2. Let us consider the following prisoner’s dilemma, and its infinitely repeated game.

Player 2
C2 D2
Player 1 C1 5, 5 3, 6
D1 6, 3 4, 4
Player i chooses Ci in period 1.
If some player chooses Dj in the previous period, player i chooses Ci forever and never choose
Ci in the future.
If player i follows this strategy,
• Player i chooses Ci, and (C1, C2) is realized in period 1.
• Player i chooses Ci, and (C1, C2) is realized in period 2.
...
• Player i chooses Ci, and (C1, C2) is realized in period t.
...
His/Her payoff is 5

Grim Trigger strategy: Never forgive the competitor.

If player i deviates from this strategy in period 1

• Player i chooses Di, and (Di, Cj) is realized in period 1.
• Player i chooses Di, and (D1, D2) is realized in period 2.
...
• Player i chooses Di, and (D1, D2) is realized in period t.
...
His/Her payoff is
(1 − δ) [6 + δ4 + δ24 + . . . ]
=(1 − δ)2 + (1 − δ) [4 + δ4 + δ24 + . . . ]
=2 − 2δ + 4 = 6 − 2δ

Forgiveness strategy: Too kind to commit himself to punishing forever.

It is obvious that if player follows this strategy, the payoff is
(1 − δ) [5 + δ5 + δ25 + δ35 + . . . ] .
If player i deviates in period 1, his payoff is
(1 − δ) [6 + δ4 + δ24 + δ35 . . . ] .
The difference is
(1 − δ)(−1 + δ + δ2).
5.1 If the discount factor is 0.7,
Grim Trigger strategy: His/Her payoff is 6 − 2δ = 6- 2x 0.7 = 4.6
=> It is optimal for player i to chooses Ci in period 1.
Forgiveness strategy: