Repeat Games

repeat games

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The study of one-shot pricing and product quality games might lead one to conclude that even tacit collusion is impossible. This is not true because competitors often interact on a continuous basis. In such circumstances, firms are said to be involved in repeat games.

When a competitive game is repeated over and over, firms receive sequential payoffs that shape current and future strategies. For example, in Table 11.2, both Coca-Cola and Pepsi-Cola might tacitly or secretly agree to charge regular prices so long as the other party continues to do so. If neither firm cheats on such a collusive agreement, discounts will never be offered, and maximum profits will be earned. Although there is an obvious risk involved with charging regular prices, there is also an obvious cost if either or both firms offer discount pricing. If each firm is convinced that the other will maintain regular prices, both will enjoy high profits. This resolve is increased if each firm is convinced that the other will quickly match any discount pricing strategy. In fact, it is rational for colluding firms to quickly and severely punish colluding competitors who "cheat" by lowering prices.

However, although it is important to recognize that the repeat nature of competitor interactions can sometimes harm consumers, it is equally important to recognize that repetitive interactions in the marketplace provide necessary incentives for firms to produce high-quality goods. In any one-shot game, it would pay firms with high-quality reputations to produce low-cost or shoddy goods. In the real world, the ongoing interaction between firms and their customers provides incentives for firms to maintain product consistency. For example, both

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