Game Theory Repeated Games

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Game Theory Repeated Games
 Repeated games are an important and simple
category of dynamic games.
 As the name suggests, repeated games are

dynamic games generated by the repetition of

some static game a certain number of times,
either finite or infinite.

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Game Theory Repeated Games
 On the other hand, repeated games are a
simple class of dynamic games because the
actions and payoffs to players stay the same
over time.
 At the same time, this feature makes

repeated games interesting.

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Game Theory Repeated Games
 Any differences between the equilibrium
outcomes of the static game must be coming
from the fact that there are multiple periods
in the interaction.

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The General Setup of the Game
 Starting with static game G, called the “stage
game” one can construct a new game which is
the repetition of G game with T rounds,
where T can be either finite or infinite.
 In each round, all players simultaneously

choose actions from their sets of possible

actions inherited from game G.

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The General Setup of the Game
 A player observes the outcome of the stage
game before the next round of play.
 Players can thus observe all of the past

outcomes of the stage game when they

choose their action in any particular round.
 All of the past outcomes are referred to as

‘history of the game’.

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The General Setup of the Game
 Players can choose different actions in the
stage game depending on the history of play
up to that point in the repeated game.
 A strategy for a player is therefore a plan

which specifies a particular action of the

stage game for each possible history of play.

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The General Setup of the Game
 Taking account of all players’ strategies
determines a sequence of outcomes
associated with a payoff for each player.
 Suppose it is period k ≤ T. The strategies

chosen by all players lead to a sequence of

payoffs for a given player.

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The General Setup of the Game
 The player’s payoff in the repeated game in
period
k = Uk + EUk+1 + E2Uk+2 +…+ ET-k UT

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The General Setup of the Game
 In other words, a player’s payoff is
discounted sum of the stream of payoffs from
the stage game, with payoffs that are
received in the future reduced by a factor of
E<1.
 There are two equivalent ways to think of E,

as a representation of impatience.

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The General Setup of the Game
Typically, if one is willing to pay some money
to get some benefit in the future, one would
be willing to pay more for that benefit today.
 Conversely, a monetary payoff today can be

invested at the risk free interest rate until

next year.

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The General Setup of the Game
 Therefore, the same amount of money
received next year is worth less than today
than the same amount of money received
today.

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Prisoners’ Dilemma Replayed
 Consider the example of Prisoners’ Dilemma
once more, this time with a repetition of the
game.
 In this game C is a dominant strategy for

both players and this game has a unique

Nash Equilibrium (C,C) worse for either player
than (S,S).

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Prisoners’ Dilemma Replayed
 Let’s consider a new game: the repetition of this
game two times.
 A strategy for each player specifies and action in
the first period and an action in the second period
for each of the four possible outcomes in the first
period.

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Prisoners’ Dilemma Replayed
 A sample strategy for player 1 is
 Period 1: Play S
 Period 2: Plays S if (S,S) otherwise C
 If both players adopt this strategy, in period

one the outcome will be (S, S) leading to a

payoff of (-1, -1) for period one.

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Prisoners’ Dilemma Replayed
 In period 2, the strategy dictates that each
player will play S again, leading to a payoff of
(-1, -1).
 The period one payoff to each player is just

the payoff in period one, plus N times the

anticipated payoff in period 2.
-1 + (-1)N.

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