Repeated Game

Published Sep 8, 2024

Definition of Repeated Game

A repeated game in economics refers to a standard game, typically in the context of game theory, that is played more than once by the same participants. Unlike a single-shot game where players interact only once, a repeated game allows players to consider the history of past interactions when making their decisions in subsequent rounds. This aspect introduces the possibility of strategies involving punishment and cooperation, as players can retaliate or reward actions from earlier rounds, leading to different outcomes compared to a single interaction.

Example

Consider two competing firms, Firm A and Firm B, situated in a town where they are the only suppliers of a particular product. Each firm has the option to set a high or low price for their product. In a single-shot game, the dominant strategy might be for both firms to set a low price to capture market share, even if it results in lower profits.

However, if this scenario is repeated over an extended period, both firms might recognize that maintaining high prices can mutually benefit them through higher profits. They could then tacitly agree to sustain higher prices, understanding that deviating from this strategy could lead to immediate competitive price cuts by the other firm in subsequent rounds, thus reducing future profits for both. This ongoing interaction illustrates how repeated games can encourage cooperative behavior that deviates from the one-time optimal strategy due to the ability to enforce cooperation through future actions.

Why Repeated Games Matter

Repeated games are crucial for understanding various economic and strategic interactions because they reflect more real-world scenarios where players repeatedly engage with one another. The possibility of future retaliation or cooperation in repeated games can significantly alter incentives and outcomes. This concept is particularly relevant in fields like:

• Business Strategy: Firms engage in repeated competitive actions, such as pricing, advertising, and product releases, where long-term strategies can prevent destructive price wars and foster stable markets.
• International Trade: Countries often negotiate trade agreements over multiple rounds, incorporating trust and reprisals into their strategies to achieve mutually beneficial outcomes.
• Labor Relations: Employers and employees repeatedly interact through contracts, wage negotiations, and other employment terms, where past behavior influences future arrangements.

Understanding repeated games aids in designing mechanisms and policies that encourage cooperation and deter uncooperative behavior in various economic arenas.

Frequently Asked Questions (FAQ)

What distinguishes repeated games from single-shot games in terms of strategy formulation?

Repeated games allow for strategies based on the history of the players’ actions, enabling the incorporation of contingent strategies that respond to past behavior. In contrast, single-shot games are devoid of any future repercussions, limiting strategies to one-round interactions. This historical consideration in repeated games enables mechanisms such as punishment for defection and rewards for cooperation, which are absent in single-shot games. Therefore, repeated interactions can lead to more cooperative equilibria, as long-term gains outweigh immediate benefits from uncooperative actions.

Can repeated games lead to outcomes like cooperation, even in competitive environments?

Yes, repeated games often lead to cooperation even in competitive settings due to the shadow of future interactions. Players recognize that uncooperative behavior in the short term can result in punitive actions in future rounds, making long-term cooperation more beneficial. The iterative nature of decision-making allows players to build trust and enforce cooperative agreements that might be unstable in single-shot contexts. This inclination towards cooperation is a cornerstone of theories like the “Folk Theorem,” which suggests that repeated interaction can sustain a range of cooperative outcomes in equilibrium.

How are markets and regulatory policies influenced by the concept of repeated games?

Regulatory policies and market designs often leverage the principles of repeated games to promote collaborative behavior and discourage short-term opportunism. For instance, antitrust regulations might prevent predatory pricing strategies by recognizing potential future retaliation from competitors. Similarly, trade policies might be structured to encourage nations to adhere to agreements over the long term, knowing that defection can lead to trade wars and sanctions. The understanding of repeated games allows policymakers to craft rules that encourage stability and mutual benefit by accounting for the ongoing interaction between market participants.