Chapter 12 Repeated Games - MIT OpenCourseWare

Chapter 12 Repeated Games In real life, most Games are played within a larger context, and actions in a given situation affect not only the present situation but also the future situations that may arise. When a player acts in a given situation, he takes into account not only the implications of his actions for the current situation but also their implications for the future. If the players arepatient and the current actionshavesignificant implications for the future, then the considerations about the future may take over. This may lead to a rich set of behavior that may seem to be irrational when one considers the current situation alone. Such ideas are captured in the Repeated Games , in which a "stage game" is played repeatedly.

Indeed, given the behavior in the last round, the game in the initial round reduces to 6 6 1 7 7 1 2 2 whereweadd1toeachplayer’spayo ffs, accounting for his payoff in the last round. The unique equilibrium of this reduced game is ( ). This leads to a unique subgame-

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