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Switching Costs in Frequently Repeated Games

  • Barton L. Lipman
  • Ruqu Wang

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
Date of revision:
Handle: RePEc:nwu:cmsems:1190
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  1. Drew Fudenberg & David Levine, 1987. "Reputation and Equilibrium Selection in Games With a Patient Player," Working papers 461, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Roger Lagunoff & Akihiko Matsui, . ""An 'Anti-Folk Theorem' for a Class of Asynchronously Repeated Games''," CARESS Working Papres 95-15, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences.
  3. Roger Lagunoff & Akihiko Matsui, 1997. "Asynchronous Choice in Repeated Coordination Games," Econometrica, Econometric Society, vol. 65(6), pages 1467-1478, November.
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  13. 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.
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  18. Prajit K. Dutta, 1997. "A Folk Theorem for Stochastic Games," Levine's Working Paper Archive 1000, David K. Levine.
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