Question

Despite there being other potential effective strategies, why would we necessarily expect firms to adopt a tit-for-tat strategy? (Why is tit-for-tat strategy so compelling?)

Answer 1

• Tit for tat is a game-theory strategy in which each participant mimics the action of their opponent after cooperating in the first round.
• Tit for tat can be used in games with repeated moves or in a series of similar games.Tit for tat emphasizes that cooperation between participants produces a more favorable outcome than a non-cooperative strategy.
• Tit-for-tat strategy so compelling because it is the only strategy that allows firms to sustain monopoly pricing as a non cooperative equilibrium.
• Tit-for-tat strategy is simple, easy to describe and easy to understand strategy.
• One reason why tit-for-tat is so compelling is that it performs well against alternative strategies in the long run. Axelrod (1984) invited several game theorists to participate in a computer tournament. They were asked to submit strategies for playing finitely-repeated, prisoner-dilemma-type games, which were then pitted against each other. Although tit-for-tat never beat another strategy (although they occasionally resulted in a tie), it won the tournament by accumulating the highest overall score. The reason, according to Axelrod, was that tit-for-tat did not close the doors to future cooperation.