Class Notes (839,574)
Canada (511,407)
Economics (953)
Lecture 17

Economics 2151B - Lecture 17.docx

4 Pages
118 Views

Department
Economics
Course Code
Economics 2150A/B
Professor
Kristin Denniston

This preview shows page 1. Sign up to view the full 4 pages of the document.
Description
Economics 2151B Monday March 12 Lecture 17 Chapter 14 Homework 4 • Chapter 14 and 15 • To be posted tonight (around midnight) • Will be due Friday March 21 (Starting with the bottom of page 7 of the notes) Repeated Gains • You will end up with a different result in the prisoner’s dilemma problem 1. You can have a gain that repeats a finite number of times OR o This will lead to different outcomes (a different Nash equilibrium) 2. The gain can repeat indefinitely into the future How does repetition affect equilibrium in the Prisoner’s Dilemma problem? • 1) Originally: o Both players played once o The players could not communicate (they could not collude) o They knew each other’s payoffs (they knew what the other player would do o  Result: a non-cooperative Nash equilibrium  Both players were worse off than if they had colluded • 2) Finite # of Repetitions: o Same result as we originally had o We can interact in the first period, and you decide if you want to cheat.  If you cheat in the first period, the other player could potentially punish you o Example: Player 1 Cheat Cooperat e Cheat 5,5 14,1 Cooperate 1,14 10,10 Player 2  If we played once, both players would cheat  If we played twice, the question is whether we should cheat or not.  Both players have a dominant strategy to cheat  After some repetition, they may see that if they both cheat, they’re worse off (so they should try to cooperate)  If both players cooperate in the first period and Player 1 wants to punish Player 2, Player 1 can cheat (both would have a dominant strategy to cheat), but they both do better if they can cooperate  If you assume the other player is still cooperating, you will try to cheat in the last period. • Each player knows the other has an incentive to cheat, so to optimize their profit they will cooperate up until the last period and then cheat in the end. o When the repetitions are finite, there will be a cheating equilibrium in all periods.  Collusion (cooperation) is not possible.  You can punish the other player by also cheating so that you both only reach the lower equilibrium • 3) Infinite # of Repetitions: o Now we can attain the cooperative equilibrium where we both make higher profits (shared monopoly/cartel equilibrium) o We don’t know when the last interaction is going to be o Two possible punishment strategies players can use to keep the other player in line: 1) Grim Trigger • Both players are cooperating as a cartel and getting the higher shared monopoly profit. One player cheats, and the other player also cheats indefinitely into the future. • Each player knows that punishment is possible into the future. If you give the player a threat that you could cheat all the way into the future, it deters the other player from cheating. • Not as good as the tit-for-tat strategy • The problem with this strategy is that you hurt yourself as well by having lower profits. 2) Tit-for-Tat • The best solution • You do what the other player did in the previous period • Allows you to cooperate again • If all of a sudden the other player decides to cheat, you would then cheat in the next period (you both end up at
More Less
Unlock Document

Only page 1 are available for preview. Some parts have been intentionally blurred.

Unlock Document
You're Reading a Preview

Unlock to view full version

Unlock Document

Log In


OR

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


OR

By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.


Submit