class 22 repeated games post

# class 22 repeated games post - Class 22 Repeated Games...

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Class 22 Repeated Games

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Problem Set ote the Reading ± Note the Reading ± Do the problem set before the next lecture: You train today’s material and prepare for next time
Last Time ournot with N Firms ± Cournot with N Firms ± Monopolistic Competition ± Bargaining in the Edgeworth Box: tertemporal Choice ± Intertemporal Choice

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Outline epeated Game ± Repeated Game ± Evaluating Infinite Streams of Payoffs ± Example: Public Good Provision
Competition and Externalities Setting high prices maximizes joint payoffs gg p j p y But incentive to undercut competitor: Increases own payoffs by +\$2M p H p L p H \$5M / \$5M \$1M / \$7M Decreases competitors payoff by - \$4M Undercutting firm does not take externality into account. p L \$7M / \$1M \$2M / \$2M Solutions: Merger: If Firms merge, they internalize the profit ffect on the other firm Cartel / Collusion Cheating today is punished the future. We need effect on the other firm Cartel / Collusion: Firms coordinate their actions and punish defections in the future. We need - a future and - patient players

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Finitely Repeated Game T Repetitions of the Game p Suppose firms interact repeatedly, say T = 4 times. ackward Induction: p H p L p H \$5M / \$5M \$1M / \$7M Backward Induction: Unique solution in last period Æ Unique solution in every period before p L \$7M / \$1M \$2M / \$2M Problem: No future in last period Æ We must not have a last period p H p L p H \$5M / \$5M \$1M / \$7M p L \$7M / \$2M / p H p L p H
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class 22 repeated games post - Class 22 Repeated Games...

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