1. 4. Repeated games Actions taken and payoffs made over and over again
Tit-for-tat strategy – player matches opponents last decision

2. Dominant strategy: 1 low, 2 low => profit of 10 each
Prisoners’ dilemma 2
Low
High 1
10, 10
100, -50
-50, 100
50, 50

3. a. Infinitely repeated game
Tit-for-tat strategy:
1 goes high, says it will match whatever 2 does last
If 2 goes high, it makes 50, 50,
If 2 goes low, it makes 100, 10, 10, 2
Low
High 1
10, 10
100, -50
-50, 100
50, 50

4. b. Finite number of repetitions
Game unravels as each competitor looks at the last period
Period 1 2 3 4 5 6 7 8
Cheat
Cheat
Cheat
Cheat
Cheat
Cheat
Cheat
Cheat
Cheat
Cheat
Cheat
Cheat
Cheat
Cheat
Cheat
Cheat

5. Cooperation can break down due to:
Too many firms => difficult to coordinate
Rapidly shifting demand or cost conditions => difficult to agree on right course of action

6. 5. Sequential games One player can move first
First mover may have an advantage
Extensive form of a game => use a decision tree

7. Enter
1%, 1%
$1,000
Dell
Don’t
15%, 0%
Apple
Enter
-10%, -10%
$800
Dell
Don’t
5%, 0%

8. 6. Competitive strategy a. Threats
Threat must be credible to have impact 2
High
Low 1
100, 80
80, 100
20, 0
10, 20

9. b. Commitment and credibility
Commitment can be used to increase credibility
Reputation important in establishing credibility
Race Car Motors
Small Cars
Big Cars
Far Out Engines
Small Engines
3, 6
3, 0
Big Engines
1, 1
8, 3
Race Car Motors
Small Cars
Big Cars
Far Out Engines
Small Engines
0, 6
0, 0
Big Engines
1, 1
8, 3

10. c. Bargaining strategy
Might be able to link two or more bargaining problems 2 A B 1
40, 5
50, 50
60, 40
5, 45 2
Work Alone
Join Consortium 1
10, 10
10, 20
20, 10
40, 40

11. d. Entry deterrence
Incumbent must convince potential entrants that entry will be unprofitable – commitment is important E
Enter
Don’t I
High price
100, 20
200, 0
Low price
70, -10
130, 0
$50 M to build plant if low price charged E
Enter
Don’t I
High price
50, 20
150, 0
Low price
70, -10
130, 0
Spend $50 M to build plant regardless

12. High
20, 50
Enter I
Low
-10, 70 E
High
0, 150
Don’t I
Low
0, 130

13. e. Strategic trade policy
Government can give subsidies to encourage activity
Airbus
Produce
Don’t
Boeing
-10, -10
100, 0
0, 100
0, 0
Airbus
Produce
Don’t
Boeing
-10, 10
100, 0
0, 120
0, 0
$20 B subsidy to Airbus to produce