3rd party repetition trade week 3 Flashcards
Examples of third party intervention for resolving the prisoners dilemma
Legal system = 3rd party
Legal enforcement of contracts/agreements; courts enforce cooperation
Government provides 3rd party incentives for cooperation.
- E.g., provision of public goods -> penalties for not contributing via taxes regulation to ensure provision.
- E.g., alloctaes a fixed number of quotas or charges for access to open access reosurces/facilities
- E.g., relaxing competition laws to allow collusion e.g., transport, league sports
Contracted enforces: third party hired by players to punish defectors - changes payoffs - threat of punishment needs to be credible
Consumers may enforce more ethical (less profitable) behaviour by firms
What can third party intervention do?
Third party intervention in the prisoners’ dilemma can reduce the benefits of defection, increase the benefits of cooperation and make it optimal or easier to cooperate/collude
Example of third party intervention in prisoners’ dilemma
Hawaiian and Aloha Airlines (2001–2005):
After the 9/11 attacks, the airline industry faced significant challenges (e.g., reduced passenger demand, increased costs).
Government Intervention:
The U.S. government temporarily exempted these airlines from anti-trust laws, allowing them to collaborate.
This included coordination on routes, flight schedules, and pricing.
Purpose:
To stabilize the industry and ensure airlines survived the economic crisis.
Cooperation reduced harmful competition, which would have made both airlines worse off.
Third party intervention repetition
Cooperation may still require repetition if difficult to impose penalties straightaway or because need large penalties (in life we play more than one game)
E.g., repeated contracting, long-term agreements.
What does repeated play scope for?
Trust, reputation, pre-commitment, promises, rewards, threats, punishments and reciprocity
Doesn’t need a 3rd party to enforce cooperation
OPEC and Saudi Arabia as an example of repeated prisoners’ dilemma games
audi Arabia’s Dominant Role:
Saudi Arabia is a “swing producer,” meaning it has the capacity to vary its oil production relatively easily and at low cost.
Because of its large production capacity, Saudi Arabia can heavily influence oil prices by increasing or decreasing output.
Enforcing Cooperation:
If other OPEC members cheat (e.g., by producing more oil to maximize their individual profits), Saudi Arabia can retaliate by increasing its output.
This retaliation would significantly lower global oil prices, harming all producers (especially smaller ones with higher production costs).
The threat of future retaliation is often enough to prevent cheating in the first place.
Indefinite repetition
Indefinite repetition - always a positive probability of repetition
Payoffs are from an expected string of repetitions = sum of payoffs from each repetition
Players maximise the expected value of these strings
Players calculate the “expected value” of cooperation over time. This means they look at the long-term benefits of sticking to an agreement.
Intuition:
Cooperation is worth it if:
The long-term benefits of working together (e.g., high profits from colluding) are greater than:
The short-term gain from cheating (breaking the agreement).
AND the punishment for cheating (e.g., others retaliating, profits dropping in the long run).
Finite repetition explained
a fixed, known number of repetitions
Less scope for cooperation - especially as time horizon approaches
What is a meta-strategy in repeated games?
A meta-strategy is a long-term plan that includes a specific response to cheating by the other player in a repeated game
Why are meta-strategies important in repeated games?
They help enforce cooperation by outlining clear punishments for cheating, discouraging players from breaking agreements
What is the Tit-for-Tat strategy?
In Tit-for-Tat, if one player cheats the other player responds by cheating in the next time period only. It is a forgiving strategy
What is the Grim strategy?
In Grim, if one player cheats, the other player responds by cheating in the next time period and in all future periods. It is an unforgiving strategy
What is a typical punishment in economic scenarios like OPEC?
Raising output levels to reduce, prices, thereby punishing the cheater by lowering the profits.
Is collusion always sustainable in repeated games?
Collusion is sustainable in some cases, but challenges arise due to infinite strategies (Folk Theorem) and finite repetition
What does the Folk Theorem state about repeated games?
The Folk Theorem states there are an infinite number of strategies that can enforce any given outcome in indefinitely or infinitely repeated games
