Question

True or false. Potential rivals may be more likely to collude if they view themselves as playing a repeated game rather than a one-time game.

Short answer

True, potential rivals are more likely to collude in a repeated game.

Step-by-step solution

Understanding the Question

The question is asking whether the likelihood of collusion between rivals is affected by the nature of the game - whether it is a repeated game or a one-time game. Collusion often occurs when firms attempt to cooperate for mutual benefit, potentially at the expense of competitive market practices.

Analyzing One-Time Game Dynamics

In a one-time game, firms make decisions without considering future interactions. Each firm typically acts in its own short-term interest, which discourages collusion. The one-time interaction limits the incentive to cooperate because future retaliatory action isn't a concern.

Analyzing Repeated Game Dynamics

In a repeated game, firms interact over multiple periods. This repeated interaction allows firms to consider the long-term benefits of cooperation, as well as the costs of defection. A typical strategy in repeated games is 'tit-for-tat', where firms reciprocate others' actions, fostering collaboration through the threat of future punishment.

Evaluating Likelihood of Collusion

Given the nature of repeated interactions, potential rivals have stronger incentives to collude in repeated games compared to one-time games, because they can punish defectors in future rounds, maintaining cooperation beneficial over the long term.

Conclusion

Considering both game structures, potential rivals are indeed more likely to collude when they see themselves in a repeated game scenario due to the possibility of building trust and punishing non-cooperation, leading to stable collusion over time.

Key concepts

Collusion

In economics, **collusion** refers to the process where businesses work together to manipulate the market. Typically, firms engage in collusion to control prices, limit production, or obstruct new competitors. This cooperative behavior is intended to increase profits for the colluding parties at the expense of market fairness.

Collusion often occurs in industries where there are only a few dominant players, a situation known as oligopoly. By colluding, these firms can effectively act as if they were a single entity.

• Collusion can be formal, with explicit agreements, or informal, where firms recognize mutual interdependence and adjust their behavior accordingly.
• While effective in increasing profit margins, collusion undermines competition laws and is illegal in many jurisdictions.

However, collusion is not without risk. If any firm breaks the agreement, it can lead to competitive retaliation, ultimately destabilizing the collusive efforts.

Repeated Games

**Repeated games** in game theory refer to scenarios where the same strategic interactions are played multiple times. This repetition can drastically influence the strategies and outcomes between players.

In a repeated game, the history of players' actions becomes critical. Each player's current move can influence not just the immediate outcome, but also their reputation and strategy in future rounds.

• Players need to weigh the long-term benefits of cooperation against the short-term temptation to defect.
• Strategies like "tit-for-tat" are common, where one player mimics the previous move of the other, rewarding cooperation and punishing betrayal.

The ability to retaliate or reward over time creates a dynamic where trust and reputation become more valuable. This often leads to stable cooperative outcomes, even in cases where a one-time game would result in immediate competition.

Strategic Interaction

**Strategic interaction** is a fundamental concept in game theory, where the decisions of one player affect the outcomes of others. Each player needs to consider not only their own strategy but also how others might respond.

In strategic interactions, players can use their understanding of others' motivations and potential strategies to inform their own decisions. This interplay is especially pronounced in economics, where the actions of competing firms, consumers, and governments interact in complex ways.

• Strategic thinking involves anticipating opponents' moves and planning multiple steps ahead.
• Many strategic interactions result in equilibrium states where no player can benefit by unilaterally changing their strategy.

Understanding these interactions is crucial for firms in competitive markets and can guide strategies to optimize outcomes while accounting for the possible responses of others.