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Problem Set 4 Repeated Games Answers

This document provides answers to problems involving repeated games and Nash equilibria. For a modified prisoner's dilemma game with a nuclear option, it finds the Nash equilibria when played once and shows an equilibrium that sustains cooperation over multiple periods by threatening the nuclear outcome. For a battle of the sexes game, it constructs fair equilibria when the game is repeated infinitely and with a 50% ending probability each period, as well as for a single-period game with a public coin flip.

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Vipul Joshi
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397 views2 pages

Problem Set 4 Repeated Games Answers

This document provides answers to problems involving repeated games and Nash equilibria. For a modified prisoner's dilemma game with a nuclear option, it finds the Nash equilibria when played once and shows an equilibrium that sustains cooperation over multiple periods by threatening the nuclear outcome. For a battle of the sexes game, it constructs fair equilibria when the game is repeated infinitely and with a 50% ending probability each period, as well as for a single-period game with a public coin flip.

Uploaded by

Vipul Joshi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOC, PDF, TXT or read online on Scribd

MBA 211 Game Theory

Problem Set 4: Repeated Games


Answers
1. Consider the following modified prisoners dilemma:
Cooperate
Defect
Nuclear

Cooperate
4, 4
5, 1
0, 0

Defect
1, 5
2, 2
0, 0

Nuclear
0, 0
0, 0
0, 0

This is simply a Prisoners dilemma with a nuclear option added to the mix
a. Suppose this game is played once. Find all the Nash equilibria
(Defect, defect) and (Nuclear, nuclear) are both Nash equilibria. Note, however, that
nuclear is a dominated strategy.
b. Suppose this game is player three times. Show that there is an equilibrium
where cooperation is sustained early in the game.
Both players play the following strategy: Cooperate in periods 1 and 2 and defect in
period 3. If any player deviates before period 3, play nuclear for the remainder of the
game.
c. Explain why our earlier conclusion about the impossibility of cooperation
in Prisoners dilemmas doesnt continue to hold for the modified
Prisoners dilemma.
The multiplicity of equilibria are a blessing in the repeated game since the nuclear
outcome provides a credible threat to sustain cooperation early in the game.
2. Consider the following battle of the sexes game
Opera
Fights

Opera
3, 1
0, 0

Fights
0, 0
1, 3

a. We know that all the pure strategy Nash equilibria are unfair in the sense
that one party gets less than the other. Construct an equilibrium in an
infinitely repeated version of the game that is fair (equal payoffs) to both
parties.
In odd numbered periods, both players go to the opera. In even numbered periods, both
players play go to the fights. Indeed, this alternation scheme is how many households
solve this type of game.

b. Suppose that the game has a 50% chance of ending each period. Show
that, even in this scenario, there is still a fair (equal payoffs in expectation)
equilibrium.
In period 1, go to opera. In all other periods, go to the fights. This yields an expected
payoff equal to 4 for both players (To see this, either simulate in Excel or recall the
finance formula for discounting a perpetuity at a 50% discount rate. Hidden lesson:
finance is really useful in game theory!)
c. Suppose that the game is played only once but the two parties can look at
the outcome of a publicly revealed coin flip prior to choosing their moves.
Show that there is an equilibrium---with strategies contingent on the coin
flip---that is still fair and that doesnt lead to miscoordination.
If heads, go to opera. If tails, go to the fights.

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