Repeated Games: Videos & Practice Problems

A repeated game in microeconomics refers to a scenario where the same game is played multiple times by the same players. Unlike one-time games, repeated games allow players to adjust their strategies based on past interactions. This dynamic can lead to different outcomes, such as increased cooperation or collusion, as players may seek to maximize their long-term benefits. Strategies like tit for tat and trigger strategy are commonly used in repeated games to enforce cooperation or punish cheating. Understanding repeated games is crucial for analyzing behaviors in market structures like oligopolies.

The tit for tat strategy in repeated games involves a player mimicking the previous action of their opponent. Initially, a player will cooperate. In subsequent rounds, the player will replicate whatever the opponent did in the previous round. If the opponent cooperated, the player will cooperate in the next round. If the opponent cheated, the player will cheat in the next round. This strategy promotes cooperation by rewarding cooperative behavior and punishing cheating, making it a powerful tool for sustaining long-term collaboration in repeated interactions.

The trigger strategy in repeated games is a strategy where a player cooperates until the opponent cheats. Once the opponent cheats, the player will cheat in all subsequent rounds. This strategy serves as a severe punishment for cheating, as it ensures that any deviation from cooperation results in a permanent loss of trust and ongoing retaliation. The trigger strategy can effectively deter cheating and promote sustained cooperation, as players understand the long-term consequences of their actions.

Repeated games are important in understanding oligopolies because they illustrate how firms in an oligopoly can sustain cooperation and avoid price wars. In an oligopoly, firms interact repeatedly over time, making it possible for them to use strategies like tit for tat or trigger strategy to enforce collusion and maintain higher prices. By understanding repeated games, economists can better analyze how firms in an oligopoly might behave, predict market outcomes, and design policies to promote competition and prevent anti-competitive practices.

Repeated games lead to cooperative outcomes by allowing players to build trust and enforce agreements over time. Strategies like tit for tat and trigger strategy encourage cooperation by rewarding collaborative behavior and punishing cheating. In a repeated game, players recognize that their actions in one round affect future interactions, making cooperation more attractive. By consistently cooperating, players can achieve higher long-term payoffs compared to the short-term gains from cheating. This dynamic fosters a stable environment where mutual cooperation becomes the rational choice.