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Repeated game

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In game theory, a repeated game is a type of interaction where players engage in a base game multiple times. This base game is often called a stage game. While a single-shot game involves only one interaction, a repeated game allows players to consider the future. Players must account for how their current choices influence the future behavior of others. This influence is often described as a player's reputation.

To understand the mechanics, consider two adjacent gas stations competing on price.

Phillips 66 Gas Station - Fuel Prices - Salt Lake City
Phillips 66 Gas Station - Fuel Prices - Salt Lake City

Both stations have the same constant marginal cost, which is the wholesale price of gasoline. If both stations set a high price, they maximize their joint profit. However, a station might be tempted to deviate by lowering its price to steal customers. In a single-shot game, this selfish move is common. This leads to a Nash equilibrium where prices drop to the marginal cost, which is inefficient for both businesses. In a repeated game, the interaction continues over an indefinite time range, changing the incentives.

Repeated games are divided into two main classes: finite and infinite. Finite games occur when players know the exact number of rounds that will be played. These games can often be solved using a method called backward induction. In this process, players look at the final round and work their way back to the start. Infinite games are played an infinite number of times, or for an unknown number of rounds. Because there is no final round, backward induction cannot be used to solve these games. The difference between these two types is significant, as they lead to very different optimal strategies and equilibria.

In infinitely repeated games, players often find ways to cooperate rather than following the selfish Nash strategy of a single stage game. This cooperation can lead to a socially optimum strategy. To maintain this, players use strategies to punish those who deviate from the cooperative plan. One example is a trigger strategy. If a player acts selfishly, the other player responds with a punishment that reduces the payoffs for both parties for the rest of the game. This threat makes cooperation more valuable than the immediate gain of acting selfishly.

Mathematical models help describe how players value these future payoffs. One method is the limit of means, which looks at the average utility over an infinite path of outcomes. Another method is discounting. In discounting, a player's valuation of a reward diminishes over time based on a discount factor, represented by the symbol delta. If a player is sufficiently patient and has a high enough discount factor, many different strategies can become a Nash equilibrium. These various results regarding how to maintain cooperation are collectively known as Folk Theorems.

Finite games behave differently depending on the number of Nash equilibria in the stage game. If the stage game has only one unique Nash equilibrium, the repeated game often results in players playing that same equilibrium every round. This happens because the known end date causes the game to "unravel" through backward induction. However, if a stage game has multiple Nash equilibria, players can use them to reward or punish others. For example, in a two-stage game, Player 1 might offer a reward in the second round if Player 2 cooperates in the first. If Player 2 deviates, Player 1 can threaten a punishment in the final round.

Researchers use advanced mathematical tools to study these complex interactions. Many techniques for solving repeated games rely heavily on linear algebra. Some studies also involve fictitious play to understand how players react to others. Furthermore, scientists study games with incomplete information. This involves situations where one player has information that the other does not. Researchers like Aumann and Maschler pioneered the study of these games. By understanding these patterns, we can see how long-term relationships and reputations shape the way people and businesses interact.

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