Econometrica: Jul, 1989, Volume 57, Issue 4

Reputation and Equilibrium Selection in Games with a Patient Player

https://doi.org/0012-9682(198907)57:4<759:RAESIG>2.0.CO;2-8
p. 759-778

David K. Levine, Drew Fudenberg

A single long-run player plays a simultaneous-move stage game against a sequence of opponents who play only once, but observe all previous play. Let the "Stackelberg strategy" be the pure strategy to which the long-run player would most like to commit himself. If there is positive prior probability that the long-run player will always play the Stackelberg strategy, then his payoff in any Nash equilibrium exceeds a bound that converges to the Stackelberg payoff as his discount factor approaches one. When the stage game is not simultaneous move, this result must be modified to account for the possibility that distinct strategies of the long-run player are observationally equivalent.