Lecture 23 - Apr 20 - Repeated Games, Cartels Collusion and Chiseling, Sequential Games Credibility

Lecture 23 Apr 20 - Economics 100A Lecture#23 Tuesday April 20 1 Repeated games 2 Cartels collusion and chiseling 3 Sequential games credibility

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Unformatted text preview: Economics 100A Lecture #23: Tuesday, April 20 1) Repeated games 2) Cartels: collusion and chiseling 3) Sequential games: credibility and commitment (1) Repeated games Why don't firms (and suspects) cooperate? When confronted with Prisoners’ Dilemma, each player has a strong incentive not to cooperate (i.e., dominant strategy) If the rival cooperates, it is still in a player’s best interest to cheat In the end, all players are worse off than if cooperated What if the future mattered more? The opportunity cost of acting unilaterally increases with the length of the relationship If the forgone payoffs mount up without limit, then perhaps players will cooperate This would be true if game repeated an infinite number of times Prisoners’ dilemma, again $0 $0-$1 +$3 Don’t build +$3-$1 +$2 +$2 Build hybrid SUV Don’t build Build hybrid SUV GM Ford vs. Prisoners’ dilemma of Cournot duopoly Recall linear duopoly profits Cournot-Nash: N = (A – c) 2 /64B Cartel: ½ m = ½(A – c) 2 /4B Defection: d = 9(A – c) 2 /64B Expressed proportional to (A – c) 2 /B Cournot-Nash: N = 1/9 Cartel: ½ m = 1/8 Defection: d = 9/64 Incentive to chisel Firm 1 Firm 2 1/9 1/9 3/32 9/64 Defect 9/64 3/32 1/8 1/8 Collude Defect Collude Supergames If a single-period game is played repeatedly, firms can base their actions on history of prior play, especially past actions of their rivals A firm can influence its rival's behavior by “signalling” to their rivals or threatening to punish them If the number of periods is finite, the Nash equilibrium will be finite repetition on one-shot Nash equilibrium “Unravels” from the end, so firms don’t collude...
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This note was uploaded on 01/19/2011 for the course C 10 taught by Professor Filippenko during the Spring '07 term at University of California, Berkeley.

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Lecture 23 Apr 20 - Economics 100A Lecture#23 Tuesday April 20 1 Repeated games 2 Cartels collusion and chiseling 3 Sequential games credibility

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