Managerial Economics

In business, strategic situations like the advertising game presented are not played once --- the firms evaluate their strategies periodically and can repeat these games for many months, quarters, or years into the indefinite future.  Even for relatively simple games like those presented in this chapter (e.g., two players with two possible actions), the Nash equilibria for infinitely repeated games are very difficult to derive analytically.  Economists have used numerical tools to simulation the outcomes from different strategies that the players may use, and the best strategy seems to be the "tit-for-tat" rule in which a firm cooperates with the other firm until the competitor deviates.  After one firm deviates from cooperation, the other firm switches its behavior to non-cooperative actions until the deviating firm returns to cooperation.  As such, firms are rewarded for cooperation and punished for deviation.

Our personal relationships may also be examined in a repeated game framework.  Of course, the payoffs in these situations do not always involve money and may include good feelings for favors done or bad feelings for hurtful actions.  Does it make sense to use the "tit-for-tat" rule when dealing with personal friends and family members?  If not, what is different about these personal relationships?  Please explain your responses.