Question
6. Suppose the following game is repeated infinitely. The players have a common discount factor , where 0 < < 1. 2 C D 1
6. Suppose the following game is repeated infinitely. The players have a common discount factor , where 0 < < 1. 2 C D 1 C 2,2 0,3 D 3,0 1,1 (a) Show that for high enough values of , there is an equilibrium of the infinitely repeated game in which (C, C) is played in every period. Your answer must state the strategies of the players clearly. [8 marks] (b) For what values of is it possible to sustain playing (D, D) each period as an equilibrium of the infinitely repeated game? [4 marks] (c) Calculate the value such that for > , there is an equilibrium of the infinitely repeated game in which players alternate between (D, C) and (C, D), starting with (D, C) in the first period. [8 marks][Hint: Player 1 has no incentive to deviate in period 0 or any other even pe-riods when (D, C) is being played. Similarly, player 2 has no incentive to deviate in odd periods when (C, D) is being played. So the only possible devia-tions are by player 1 in odd periods and by player 2 in even periods. Given that the game is symmetric, if we can prevent a deviation by 1, that would also work for preventing deviation by 2.]
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