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 Incentives for Cooperation
The government uses laws, regulations, and incentives to encourage cooperation and prevent defection in scenarios like:
Provision of Public Goods:
Public goods (e.g., clean air, national defense) benefit everyone, but individuals or companies might not voluntarily contribute.
Government solution: Impose taxes to fund public goods and penalize those who don’t pay (e.g., fines for tax evasion).
Open Access Resources:
Resources like fisheries, forests, or clean water are at risk of overuse when left unmanaged (a “Tragedy of the Commons”).
Government solution:
Allocate quotas (e.g., limits on how much fish a company can catch).
Charge fees for resource use to discourage overuse.
Relaxing Competition Laws:
In certain industries (e.g., sports leagues, transportation), competition might harm the collective good (e.g., leading to unsustainable practices).
Government solution: Allow limited collusion (e.g., teams or companies coordinate on pricing or resource use) to achieve collective benefits.
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.
Why is repetition important for third-party intervention in resolving dilemmas like the Prisoner’s Dilemma?
Repetition encourages cooperation because:
Penalties for defection may take time to enforce.
Parties expect future interactions, so defection now risks future trust or opportunities.
Examples: Repeated contracts, 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
Definition: The game is repeated an unknown or potentially infinite number of times.
Key Insight: Cooperation is more likely because the end of the game is uncertain.
Reasoning:
Since players don’t know when the game will end, the shadow of the future becomes important.
Defecting now risks retaliation in future rounds, which could harm long-term payoffs.
This creates an incentive for players to cooperate if the benefit of future cooperation outweighs the short-term gain of defecting.
Strategies like Tit-for-Tat (cooperate unless the other defects, then retaliate) can enforce cooperation.
Finite repetition explained
Definition: The game is repeated a fixed number of times (e.g., 10 rounds).
Key Insight: Cooperation is harder to sustain because players know the game will end.
Reasoning:
In the last round, there is no future consequence for defecting, so rational players will always defect in the final round.
Knowing this, players will also defect in the second-to-last round, and this reasoning continues backward (this is called backward induction).
Result: Defection is the dominant strategy in each round of a finite game.
What is a meta-strategy in repeated games?
A meta-strategy is a long-term plan for repeated games, focusing on how to cooperate or defect over time.
Examples:
- Tit-for-Tat
- Grim strategies
Why are meta-strategies important in repeated games?
They help enforce cooperation by outlining clear punishments for cheating, discouraging players from breaking agreements.
A meta-strategy is like your ultimate game plan for slaying in repeated games of the Prisoner’s Dilemma. Instead of deciding what to do round-by-round, you pick a rule or vibe that you’ll follow for all the rounds.
It’s your “how do I keep slaying and winning?” guide. 👑
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 infinitly repeated games (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
When should you cooperate in repeated games?
Solving prisoners’ dilemma (firms should collude if)
a/(1-P) > c + dP/(1-P)
