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Solving payoff sets of perfect public equilibria: an example

Du, Chuang (2012): Solving payoff sets of perfect public equilibria: an example.

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Abstract

We study an example of infinitely repeated games in which symmetric duopolistic firms produce experience goods. After consuming the products, short-run consumers only observe imperfect public information about product quality. We characterize perfect public equilibrium payoff set E(δ) of firms for each fixed discount factor δ∈[0,1) when each firm has two action choices, signals follow binomial distributions and the game has a product structure. The set E(δ) turns out a single point or symmetric pentagon for fixed δ. And δ∈[0, 1) can be divided into countable infinite subintervals in which E(δ) remains constant. The strategies to implement payoffs in boundaries of E(δ) are constructed in a recursive way, in which infinite repetition of Nash Equilibrium of stage game could be viewed as an absorbing state in a Markov Process where state transitions are controlled through public signals and optimal punishments in each period.

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