Game Theory and Economic Applications – 6BUS1140

The repeated version of the Prisoners’ Dilemma

So far we have studied static games and dynamic games. This week we are
examining repeated games: a repeated game is a static game played at least twice
(between the same players). For example, the figure below represents a repeated
game, where Player 1 and Player 2 play the ‘Hawk-Dove’ game for four periods (or
rounds):

Study of repeated games is interesting because most social (or market)

interactions are indeed repeated. Will the repetition of the game make a difference?
Or will we have the same equilibria as in the static version of the game? It would
appear that, in a repeated game, the strategic options for players expand significantly.
For instance, it now becomes possible to condition what you do on what your
opponent has done in previous rounds. This means that you can punish or reward your
opponent depending on what they have done in the past. Obviously, this is not
possible when the game is static. Likewise players learn things about their opponents
from the way they have behaved in the past, which might affect choice in subsequent
rounds of the game.

We will use The Prisoners’ Dilemma to see what happens if we assume the
game to be repeated. As we know, the static version has a unique Nash equilibrium
(which is good news because we have no indeterminacy). On the other hand, this
unique Nash equilibrium excludes cooperative behaviour, leaving no hope for human
agency. Maybe if the game is repeated cooperation among the players can be
sustained as an equilibrium?

Assume then that players R and C play the Prisoners’ Dilemma for N rounds.
N is assumed to be finite and known to both players. This is the game played in each
period:

We have seen that when time is involved, the standard approach is backward
induction. Let us then begin with t=N (the last period). Clearly, both players will
defect in the last play. The last period is, after all, just a one-shot version of the game
and the logic of defection for rational players is impeccable. There is no reason why
any of the players would want to cooperate at t=N.

Let us now go to t=N–1. Since it is known that both players will defect in the
last play (courtesy of common knowledge of rationality), neither player has any need
to carry a reputation for cooperation into that last period. Hence neither player need
nurture future reputation when they play the penultimate round of the game. But,
when neither party cares about their reputation, the logic of defection as the dominant
strategy re-emerges and so both players will defect in the penultimate play.

At t=N–2, it is known that both will defect at t=N–1 (CKR again), and
therefore neither player needs a reputation in the penultimate round; therefore both
will defect… and so on.

Thus the subgame perfect Nash equilibrium yields the clear prediction that
both players will defect in every round of the game. Consequently the intuition
regarding the influence of repetition seems to be wrong in this particular game – to the
extent of course that we accept the subgame perfect Nash equilibrium as a valid
approach (and we have seen enough to have at least some doubts).

If you read about Selten’s ‘chain store paradox’ under Week 5’s Additional
Material page an alternative approach is proposed, but it comes at the cost of relaxing
the CKR assumption. If we want our CKR assumption intact, the conclusion is
inescapable: R and C will always defect in all rounds of the game.

Note: This document contains an excerpt from Hargreaves-Heap and Varoufakis’ Game
Theory: A critical introduction (1995, Routledge).