Nash Reversion Revisited:Implications of Gain/Loss Asymmetry

Game theory proves the existence of a stronger punishment than the Nash reversion in the repeated games. Recent empirical findings in Oligopoly, however, suggest the implementation of the Nash reversion. In a standard repeated game setting, we propose a potential answer for this empirical puzzle by using a refined version of the discounted utility that exhibits gain/loss asymmetry, where players discount gains more than losses. Our main result is as follows: among gain/loss robust subgame perfect equilibria, the Nash reversion offers the strongest punishment. The robustness is based on the assumption that players are unsure about their own level of gain/loss asymmetry and choose only the strategies that are subgame perfect for any level of gain/loss asymmetry they can perceive as possible.