as the result of cheating), the severity of punishment should be kept to the minimum required to deter the act of cheating. ii.) Tit-for-Tat. Trigger strategies are not the only way to reach the non-co-operative collusion. Another famous strategy is Tit-for-Tat, according to which a player chooses in the current period what the other player chose in the previous period. Cheating by either firm in the previous round is therefore immediately punished by cheating, by the other, in this round. Cheating is never allowed to go unpunished. Tit-for-Tat satisfies a number of criteria for successful punishment strategies. It carries a clear threat to both parties, because it is one of the simplest conceivable punishment strategies and is therefore easy to understand. It also has the characteristics that the mode of punishment it implies does not itself threaten to undermine the cartel agreement. This is because firms only cheat in reaction to cheating be others; they never initiate a cycle of cheating themselves. Although it is a tough strategy, it also offers speedy forgiveness for cheating, because once punishment has been administered the punishing firm is willing once again to restore co-operation. Its weakness is in the fact that information is imperfect in reality, so it is hard to detect whether a particular outcome is the consequence of unexpected external events such as a lower demand than forecast, or cheating, Tit-for-Tat has a capacity to set up a chain reaction in a response to an initial mistake.d.) Finite game case, Kreps approach. Lets now return to the question of how collusion might occur non-co-operatively even in the finitely repeated game case. Intuition said that collusion could happen- at least at the earlier rounds- but the game theory apparently said that it could not. Kreps et al. (1982) offered the elegant solution to this paradox. They relax the assumption of complete information and instead suppose that one playe...
