Alternative Definitions of Renegotiation-Proofness in Repeated Games

DECISIONS & GAMES
Lecture Twelve Slides
Alternative definitions of renegotiation-proofness in repeated games

30
40
60
30
1800, 1800
40
1500, 2000
2000, 1500
1800 900
1800,
1600, 1600
1200 800
1200,
60
900, 1800
800, 1200
0 0
0,
An SPNE in an infinitely repeated game is strongly renegotiationproof if and only if, after a unilateral deviation by any player in any
period t , the specified post-deviation continuation SPNE payoffs of
all non-deviating players are no less than what their continuation
SPNE ppayoffs
y
would be iff the deviation did not occur in pperiod t.
An SPNE in an infinitely repeated game is weakly renegotiation-proof
if and only if, after a unilateral deviation by any player in any period t,
the specified post-deviation continuation SPNE payoffs of all nondeviating players are no less than what their continuation payoffs
would be if the deviation occurred in every period after t.
Repeated Cournot Game: renegotiation-proofness of grim strategy

30
40
60
30
1800, 1800
40
1500, 2000
2000, 1500
1800 900
1800,
1600, 1600
1200 800
1200,
60
900, 1800
800, 1200
0 0
0,
Each player starts with 30 and continues to play 30 so long as all

have played 30 in the past; if any player plays a volume 30 in
any period , each player plays 40 in all future periods.
In the infinitely repeated Cournot game, the grim strategy
is not strongly renegotiation-proof but is weakly renegotiation-proof
since while 1800/(1 ) > 1600/(1 )
it is true that 1600/(1 ) > 1500/(1 )
Arijit Sen | IIM Calcutta | 2016
DECISIONS & GAMES
Summary: Grim strategy in Infinitely Repeated Cournot Game

Firm B
P = 140 - Q
TC = 20q
Firm A
30
30
1800, 1800
40
1500, 2000
60
900, 1800
40
60
2000, 1500
1800, 900
1600, 1600
1200, 800
800, 1200
0, 0
A & B compete in infinitely-repeated volume-setting given = (dp)(0,1)

Consider the grim strategy with punishment of perpetual Nash reversion:
any period , each player plays 40 in all future periods.
periods.
The punishment threat is credible,
effective when > ,
and weakly renegotiation-proof
and trivially coalition-proof
[a punishment threat rationally sustains collusion iff its credible & effective]
Trigger strategy in Infinitely Repeated Cournot Game

Firm B
P = 140 - Q
TC = 20q
Firm A
30
30
1800, 1800
40
1500, 2000
60
900, 1800
40
2000, 1500
1600, 1600
800, 1200
60
1800, 900
1200, 800
0, 0
A & B compete in infinitely-repeated volume-setting given = (dp)(0, 1)

Consider trigger strategy with punishment of T-period Nash reversion:
anyy p
period ,, each p
player
y p
plays
y 40 for next T p
periods ((and then
revert to cooperation).
The punishment threat is credible, effective when is sufficiently high,
and weakly renegotiation-proof
One can check whether a trigger strategy is effective by considering a
one-shot deviation from cooperation; but when it is not effective the
optimal way to cheat will involve multiple deviations
DECISIONS & GAMES
4 questions regarding infinitely repeated cooperation dilemmas

For a proposed set of strategies that aim to sustain a collusion
target, how do we determine whether the strategies constitute an
SPNE of the infinitely repeated game that rationally sustains (i.e.,
credibly and effectively sustains) the desired collusion target?
Consider a proposed set of SPNE strategies which is found to
rationally sustain a desired collusion target (i.e., the incorporated
threats are credible and effective). How do we determine whether
the proposed SPNE is renegotiation-proof?
For any given value of and a specific collusion target, how do we
d
determine
i whether
h h there
h exists
i any credible
dibl andd effective
ff i
punishment strategies that will rationally sustain the collusion target
as an SPNE? [Research by Dilip Abreu addresses this question]
And, when there are more than two players, how do we determine
whether the proposed SPNE is coalition-proof?
Infinitely Repeated Cournot Game : use of simple penal codes

Firm B
Firm A
30
30
1800, 1800
40
1500, 2000
60
900, 1800
40
60
2000, 1500
1800, 900
1600, 1600
1200, 800
800, 1200
0, 0
Define the following three codes (following Dilip Abreus research):

1. Cooperation Code C = (30; 30) in every period
2. Penal Code PA= (30; 60) in every period [Stackelberg reversion]
3. Penal Code PB = (60; 30) in every period
Then consider the following three-phase
three phase strategy profile:
Each firm starts by playing according to the cooperation code C;
a deviation by Firm A from any ongoing code either C or PA or PB
requires the firms to play according to PA from then on forever;
a deviation by Firm B from any ongoing code either C or PA or PB
requires the firms to play acc. to PB from then on forever
DECISIONS & GAMES
30
30
1800, 1800
40
1500, 2000
60
900, 1800
40
60
2000, 1500
1800, 900
1600, 1600
1200, 800
800, 1200
0, 0
Consider strategy profile {C= (30; 30); PA= (30; 60); PB= (60; 30)}
- This strategy profile is simple in that the penal code for firm i is the
same irrespective of how and when it cheats
- This strategy profile employs optimal penal codes because the
punished player is held to his maximin payoff
Conclusions: The proposed simple strategy profile rationally sustains
(i.e., credibly and effectively sustains) the maximal cooperation
target{30, 30} if > 2/11.
The proposed simple strategy profile is strongly renegotiation-proof
since p.v. payoff to firm I under the penal code PJ = 1800/(1- )
Here, maximal collusion {30, 30} can be rationally sustained only if
> 2/11 since the proposed strategy specifies optimal penal codes
30
30
1800, 1800
40
1500, 2000
60
900, 1800
40
60
2000, 1500
1800, 900
1600, 1600
1200, 800
800, 1200
0, 0
Consider strategy profile {C= (30; 30); PA= (30; 60); PB= (60; 30)}
Proof that the strategy profile rationally sustains {30, 30}
whenever > 2/11. :
For > 2/11, the strategy profile is
credible as it is SPNE in both punishment phases PA and PB
and effective as it is SPNE in cooperation phase C
collusion constraint in either phase: 1800/(1-) > 2000 + 900./(1- )
DECISIONS & GAMES
Repeated Advertising Game (a game in strategic complements)

Firm B
low
low
50, 50
medium
32, 60
high
25, 55
Firm A med
60, 32
40, 40
26, 42
high
55, 25
42, 26
30, 30
Firms A and B compete in a repeated advertising game for T periods

given = dp (0, 1), where in each period each firm can set one of
three ad expenditure levels: low ad, or medium ad, or high ad
Unique SPNE for any T finite:
Irrespective of past history, each firm sets high ad in every period
T-fold repetition of the unique stage-game Nash eqm
Repeated Advertising Game : grim strategy

Firm B
low
Firm A med
high
low
50, 50
medium
32, 60
high
25, 55
60, 32
55, 25
40, 40
42, 26
26, 42
30, 30
Given (0,1) & T=, consider following grim strategy:

Each player starts with low and continues to play low so long as
all have played low in the past; if any player plays ad exp low
in any period , each player plays high in all future periods.
Collusion constraint : 50/(1 ) > 60 + 30./(1 ) > 1/3
Conclusions: The grim strategy rationally sustains the maximal
cooperation target{low, low} if > 1/3.
The grim strategy is neither strongly nor weakly renegotiation-proof
Maximal collusion {low, low} can be sustained in an SPNE only if
> 1/3 because the grim strategy specifies optimal penal codes
DECISIONS & GAMES
Optimal Penal Codes in Repeated Cooperation Dilemmas

strategic
substitutes
30
30
1800, 1800
40
1500, 2000
60
900, 1800
40
2000, 1500
1600, 1600
800, 1200
60
1800, 900
1200, 800
0, 0
Cooperation target: (30; 30); optimal penal codes: PA = (30; 60), PB = (60; 30)
Result: Cooperation target (30; 30) is sustainable if and only if > 2/11
Optimal penal codes are strongly renegotiation-proof
strategic
compliments
low
low
50, 50
medium
32, 60
high
25, 55
medium
60, 32
40, 40
26, 42
high
55, 25
42, 26
30, 30
Cooperation target: (low; low); optimal penal codes: PA = PB = (high; high)

Result: Cooperation target (low; low) is sustainable if and only if > 1/3
Optimal penal codes are not renegotiation-proof

Alternative Definitions of Renegotiation-Proofness in Repeated Games

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Alternative Definitions of Renegotiation-Proofness in Repeated Games

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DECISIONS & GAMES

Lecture Twelve Slides