Question

what sort of insight does folk theorem provides to firms seeking to escape the Nash Equilibrium of the static Prisoners’ Dilemma game played in highly competitive (Cournot or Bertrand) markets

Answer 1

In game theory, Folk theorems are a class of theorems about possible Nash equilibrium payoffs in repeated games. It suggests that if player is patient enough and far sighted then not only can repeated actions allow many subgame perfect equilibrium outcomes but SPE can allow virtually any outcome in the sense of average payoffs The theorem suggests anything which is feasible and individually rational is possible.

For example one shot prisoner's dilemma if both players cooperate is not a nash equilibrium. The only nash equilibrium is when both players defect which is also a mutual minimax profile. One folk theorem says that in an infinitely repeated version of the game, provided players are sufficiently patient, there is a nash equilibrium such that both players cooperate on the equilibrium path. But in finitely repeated game by using backward induction, it can be determined that players play nash equilibrium in the last period of the game.i.e. which is to defect.