Problem 2. Below-Nash punishment. Consider an infinite repeated game where the stage game is given as follows: Player 2 L C R T 10,10 3, 15 0,7 Player 1 M 15,3 7,7 -4,5 B 7,0 5,-4 -15, 15 (a) Find all pure-strategy Nash equilibrium of the stage game. (b) Using Folk Theorem, show that there exists a discount factor 8 < 1 such that a pure strategy subgame perfect equilibrium in which the players play strategy profile TL in every period along the equilibrium path. (c) Prove that off-equilibrium path punishment of MR, TC, TC,... for player 1, and BC, ML, ML,... for player 2 is a support for equilibrium.

Microeconomic Theory
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Chapter8: Game Theory
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Problem 2. Below-Nash punishment. Consider an infinite repeated game where the stage
game is given as follows:
Player 2
L
C
R
T
10,10
3, 15
0,7
Player 1
M
15,3
7,7
-4,5
B
7,0
5,-4 -15, 15
(a) Find all pure-strategy Nash equilibrium of the stage game.
(b) Using Folk Theorem, show that there exists a discount factor 8 < 1 such that a pure strategy
subgame perfect equilibrium in which the players play strategy profile TL in every period
along the equilibrium path.
(c) Prove that off-equilibrium path punishment of MR, TC, TC,... for player 1, and BC, ML,
ML,... for player 2 is a support for equilibrium.
Transcribed Image Text:Problem 2. Below-Nash punishment. Consider an infinite repeated game where the stage game is given as follows: Player 2 L C R T 10,10 3, 15 0,7 Player 1 M 15,3 7,7 -4,5 B 7,0 5,-4 -15, 15 (a) Find all pure-strategy Nash equilibrium of the stage game. (b) Using Folk Theorem, show that there exists a discount factor 8 < 1 such that a pure strategy subgame perfect equilibrium in which the players play strategy profile TL in every period along the equilibrium path. (c) Prove that off-equilibrium path punishment of MR, TC, TC,... for player 1, and BC, ML, ML,... for player 2 is a support for equilibrium.
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