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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.

Suggested Citation

  • Barton L. Lipman & Ruqu Wang, 1997. "Switching Costs in Frequently Repeated Games," Discussion Papers 1190, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  • Handle: RePEc:nwu:cmsems:1190
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    Cited by:

    1. Dutta, Rohan & Ishii, Ryosuke, 2016. "Dynamic commitment games, efficiency and coordination," Journal of Economic Theory, Elsevier, vol. 163(C), pages 699-727.
    2. Gourio, Francois & Kashyap, Anil K, 2007. "Investment spikes: New facts and a general equilibrium exploration," Journal of Monetary Economics, Elsevier, pages 1-22.
    3. Caruana, Guillermo & Einav, Liran & Quint, Daniel, 2007. "Multilateral bargaining with concession costs," Journal of Economic Theory, Elsevier, vol. 132(1), pages 147-166, January.
    4. Luís M. B. Cabral & Thomas W. Ross, 2008. "Are Sunk Costs a Barrier to Entry?," Journal of Economics & Management Strategy, Wiley Blackwell, pages 97-112.
    5. Lipman, Barton L. & Wang, Ruqu, 2009. "Switching costs in infinitely repeated games," Games and Economic Behavior, Elsevier, vol. 66(1), pages 292-314, May.
    6. Hitoshi Matsushima, 2010. "Finitely Repeated Prisoners' Dilemma with Small Fines: Penance Contract," CARF F-Series CARF-F-208, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    7. Miyahara, Yasuyuki & Sekiguchi, Tadashi, 2013. "Finitely repeated games with monitoring options," Journal of Economic Theory, Elsevier, vol. 148(5), pages 1929-1952.
    8. Spiegler, Ran, 2015. "Agility in repeated games: An example," Economics Letters, Elsevier, vol. 131(C), pages 47-49.
    9. Kano, Kazuko, 2013. "Menu costs and dynamic duopoly," International Journal of Industrial Organization, Elsevier, pages 102-118.
    10. Libich, Jan, 2008. "An explicit inflation target as a commitment device," Journal of Macroeconomics, Elsevier, pages 43-68.
    11. Norman, Thomas W.L., 2009. "Rapid evolution under inertia," Games and Economic Behavior, Elsevier, vol. 66(2), pages 865-879, July.
    12. repec:kbb:dpaper:2011-44 is not listed on IDEAS
    13. Thomas Norman, 2010. "Cycles versus equilibrium in evolutionary games," Theory and Decision, Springer, pages 167-182.
    14. Martzoukos, Spiros H. & Zacharias, Eleftherios, 2013. "Real option games with R&D and learning spillovers," Omega, Elsevier, vol. 41(2), pages 236-249.
    15. Sonsino, Doron & Sirota, Julia, 2003. "Strategic pattern recognition--experimental evidence," Games and Economic Behavior, Elsevier, vol. 44(2), pages 390-411, August.
    16. Barton L. Lipman & Ruqu Wang, 2006. "Switching Costs in Infinitely Repeated Games1," Boston University - Department of Economics - Working Papers Series WP2006-003, Boston University - Department of Economics.
    17. Rohan Dutta & Sean Horan, 2015. "Inferring Rationales from Choice: Identification for Rational Shortlist Methods," American Economic Journal: Microeconomics, American Economic Association, vol. 7(4), pages 179-201, November.

    More about this item

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games

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