Immediately Reactive Equilibria in Infinitely Repeated Games with Additively Separable Continuous Payoffs

Takashi Kamihigashi and Taiji Furusawa

No 199, Discussion Paper Series from Research Institute for Economics & Business Administration, Kobe University

Abstract: This paper studies a class of infinitely repeated games with two players in which the action space of each player is an interval, and the one-shot payoff of each player is additively separable in their actions. We define an immediately reactive equilibrium (IRE) as a pure-strategy subgame perfect equilibrium such that the action of each player is a stationary function of the last action of the other player. We show that the set of IREs in the simultaneous move game is identical to that in the alternating move game. In both games, IREs are completely characterized in terms of indifference curves associated with what we call effective payoffs. A folk-type theorem using only IREs is established in a special case. Our results are applied to a prisoner's dilemma game with observable mixed strategies and a duopoly game. In the latter game, kinked demand curves with a globally stable steady state are derived.

Pages: 42 pages
Date: 2006-12
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