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The chain store paradox

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  • Selten, Reinhard

    (Center for Mathematical Economics, Bielefeld University)

Abstract

It is the purpose of this paper to present the example of a simple game in extensive form where the actual behavior of well informed players cannot be expected to agree with the clear results of game theoretical reasoning. A story about a fictitious chain store and its potential competitors is a convenient way to describe the game. This expositionary device should not be misunderstood as a model of a real situation. In view of the story the game will be called "the chain store game". The disturbing disagreement between plausible game behavior and game theoretical reasoning constitutes the "chain store paradox". The chain store paradox throws new light on the well known difficulties which arise in connection with the finite supergame of prisoners' dilemma game. A limited rationality approach seems to be needed in order to explain human strategic behavior. An attempt shall be made to discuss the possibility of a "tree-level theory of decision making" as an explanation of discrepancies between game theoretic analysis and human behavior.
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Suggested Citation

  • Selten, Reinhard, 2017. "The chain store paradox," Center for Mathematical Economics Working Papers 18, Center for Mathematical Economics, Bielefeld University.
  • Handle: RePEc:bie:wpaper:18
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    File URL: https://pub.uni-bielefeld.de/download/2909633/2911217
    File Function: First Version, 1974
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    References listed on IDEAS

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    1. Melvin Guyer & John Fox & Henry Hamburger, 1973. "Format Effects in the Prisoner's Dilemma Game," Journal of Conflict Resolution, Peace Science Society (International), vol. 17(4), pages 719-744, December.
    2. Hart, Sergiu & Kohlberg, Elon, 1974. "Equally distributed correspondences," Journal of Mathematical Economics, Elsevier, vol. 1(2), pages 167-174, August.
    3. Reinhard Selten, 1973. "A Simple Model of Imperfect Competition, where 4 are Few and 6 are Many," Center for Mathematical Economics Working Papers 008, Center for Mathematical Economics, Bielefeld University.
    4. Lester B. Lave, 1962. "An Empirical Approach to the Prisoners' Dilemma Game," The Quarterly Journal of Economics, Oxford University Press, vol. 76(3), pages 424-436.
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    1. repec:wsi:wschap:9789812818478_0007 is not listed on IDEAS
    2. Lee, C. B. & Murphy, W. D. & Fletcher, L. R. & Binner, J. M., 1998. "Dynamic entry deterrence in the UK pathology services market," European Journal of Operational Research, Elsevier, vol. 105(2), pages 296-307, March.
    3. Kreps, David M. & Wilson, Robert, 1982. "Reputation and imperfect information," Journal of Economic Theory, Elsevier, vol. 27(2), pages 253-279, August.
    4. David Ettinger & Philippe Jehiel, 2004. "Towards a Theory of Deception," Levine's Bibliography 122247000000000247, UCLA Department of Economics.
    5. Haltiwanger, John & Waldman, Michael, 1985. "Rational Expectations and the Limits of Rationality: An Analysis of Heterogeneity," American Economic Review, American Economic Association, vol. 75(3), pages 326-340, June.
    6. Haltiwanger, John & Waldman, Michael, 1991. "Responders versus Non-responders: A New Perspective on Heterogeneity," Economic Journal, Royal Economic Society, vol. 101(408), pages 1085-1102, September.
    7. Drew Fudenberg & David K. Levine, 2008. "Reputation And Equilibrium Selection In Games With A Patient Player," World Scientific Book Chapters,in: A Long-Run Collaboration On Long-Run Games, chapter 7, pages 123-142 World Scientific Publishing Co. Pte. Ltd..
    8. K. Schmidt, 1999. "Reputation and Equilibrium Characterization in Repeated Games of Conflicting Interests," Levine's Working Paper Archive 626, David K. Levine.

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