Question

Assume that a finite game is played repeatedly, and it has a definite end. Under what condition can collusion occur leading to a better outcome for the players?

Select one:

a. None of the answers is correct since collusion cannot occur in a repeating game with a definite end.

b. The secure strategy outcome corresponds to the dominant strategy outcome.

c. The payoff under collusion is equal to the Nash equilibrium payoff.

d. The Nash equilibrium has a payoff not equal to zero.

e. The interest rate is very high.

Answer 1

Here, option (a) is the right answer.

A repeated game is a special kind of a game in which the one-shot stage game is played over again and again. A finitely repeated game is a game in which the game is played for a fixed number of times. Since the players know that the game is going to end, they are expected to play their dominant strategies till the last round. Collusion refers to agreement between the players so that they end the game with equal benefits to the players and thus restrain the competition.

· In option (b), a condition is given when the secure strategy outcome is equal to the dominant strategy outcome. A secure strategy is a safe strategy, whereas a dominant strategy refers to a strategy that results in better payoffs. In a finite game, the players know that the game is going to end and hence would focus on dominant strategy always and thus an equilibrium may not be achieved between the secure and dominant strategy.

· A payoff represents a possible value associated with a game outcome. In a Nash equilibrium, the player has no access to excess incentive ie; a player has no option to defer from the initial strategy which cannot be the case in a finite game which moves via dominant strategy outcomes.

· Under a condition when the net payoff does not equal to zero, it means that both players have the ability to play further and hence represents a finite game and here collusion cannot occur.