The prisoners’ dilemma shows that cooperation is difficult. But is it impossible? Not all prisoners, when questioned by the police, decide to turn in their partners in crime. Cartels sometimes do manage to maintain collusive arrangements despite the incentive for individual members to defect.

Very often, the reason that players can solve the prisoners’ dilemma is that they play the game not once but many times. To see why cooperation is easier to enforce in repeated games, let’s return to our duopolists, Jack and Jill, whose choices were given in Figure 3. Jack and Jill would like to agree to maintain the monopoly outcome in which each produces 30 gallons. Yet if Jack and Jill are to play this game only once, neither has any incentive to live up to this agreement. Self-interest drives each to renege and choose the dominant strategy of 40 gallons.

Now suppose that Jack and Jill know that they will play the same game every week. When they make their initial agreement to keep production low, they can also specify. what happens if one party reneges. They might agree, for instance, that once one of them reneges and produces 40 gallons, both will produce 40 gallons forever after. This penalty is easy to enforce, for if one party is producing at a high level, the other has every reason to do the same.

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