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Switching Costs in Frequently Repeated Games

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  • Barton L. Lipman
  • Ruqu Wang

Abstract

We show that the standard results for finitely repeated games do not survive the combination of two simple variations on the usual model. In particular, we add a small cost of changing actions and consider the effect of increasing the frequency of repetitions within a fixed period of time. We show that this can yield multiple subgame perfect equilibria in games like the Prisoners' Dilemma which normally have a unique equilibrium. Also, it can yield uniqueness in games which normally have multiple equilibria. For example, in a two by two coordination game, if the Pareto dominant and risk dominant outcomes coincide, the unique subgame perfect equilibrium for small switching costs and frequent repetition is to repeat this outcome every period. Also, in a generic Battle of the Sexes game, there is a unique subgame perfect equilibrium for small switching costs.

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Paper provided by Northwestern University, Center for Mathematical Studies in Economics and Management Science in its series Discussion Papers with number 1190.

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Date of creation: Jul 1997
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Handle: RePEc:nwu:cmsems:1190

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  1. Roger Lagunoff & Akihiko Matsu, . "Asynchronous Choice in Repeated Coordination Games," Penn CARESS Working Papers 23a1aa461811b8f48b0334f6e, Penn Economics Department.
  2. Drew Fudenberg & David K. Levine, 1995. "Reputation and Equilibrium Selection in Games with a Patient Player," Levine's Working Paper Archive 103, David K. Levine.
  3. Gul, Faruk & Sonnenschein, Hugo, 1988. "On Delay in Bargaining with One-Sided Uncertainty," Econometrica, Econometric Society, Econometric Society, vol. 56(3), pages 601-11, May.
  4. Prajit K. Dutta, 1997. "A Folk Theorem for Stochastic Games," Levine's Working Paper Archive 1000, David K. Levine.
  5. Carlsson, Hans & van Damme, Eric, 1993. "Global Games and Equilibrium Selection," Econometrica, Econometric Society, Econometric Society, vol. 61(5), pages 989-1018, September.
  6. Dutta Prajit K., 1995. "Collusion, Discounting and Dynamic Games," Journal of Economic Theory, Elsevier, vol. 66(1), pages 289-306, June.
  7. Young, H Peyton, 1993. "The Evolution of Conventions," Econometrica, Econometric Society, Econometric Society, vol. 61(1), pages 57-84, January.
  8. Padilla A. Jorge, 1995. "Revisiting Dynamic Duopoly with Consumer Switching Costs," Journal of Economic Theory, Elsevier, vol. 67(2), pages 520-530, December.
  9. Beggs, Alan & Klemperer, Paul, 1990. "Multi-Period Competition with Switching Costs," CEPR Discussion Papers 436, C.E.P.R. Discussion Papers.
  10. M. Kandori & G. Mailath & R. Rob, 1999. "Learning, Mutation and Long Run Equilibria in Games," Levine's Working Paper Archive 500, David K. Levine.
  11. Roger Lagunoff & Akihiko Matsui, . ""An 'Anti-Folk Theorem' for a Class of Asynchronously Repeated Games''," CARESS Working Papres, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences 95-15, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences.
  12. Dutta Prajit K., 1995. "A Folk Theorem for Stochastic Games," Journal of Economic Theory, Elsevier, vol. 66(1), pages 1-32, June.
  13. Benoit, Jean-Pierre & Krishna, Vijay, 1985. "Finitely Repeated Games," Econometrica, Econometric Society, Econometric Society, vol. 53(4), pages 905-22, July.
  14. Ruqu Wang & Quan Wen, 1998. "Strategic Invasion in Markets with Switching Costs," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 7(4), pages 521-549, December.
  15. Frankel, David M. & Burdzy, Krzysztof & Pauzner, Ady, 2001. "Fast Equilibrium Selection by Rational Players Living in a Changing World," Staff General Research Papers 11923, Iowa State University, Department of Economics.
  16. Gale, Douglas, 1995. "Dynamic Coordination Games," Economic Theory, Springer, vol. 5(1), pages 1-18, January.
  17. Chakrabarti, Subir K., 1990. "Characterizations of the equilibrium payoffs of inertia supergames," Journal of Economic Theory, Elsevier, vol. 51(1), pages 171-183, June.
  18. P. Young, 1999. "The Evolution of Conventions," Levine's Working Paper Archive 485, David K. Levine.
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