TRADE WAR: A GAME THEORETIC APPROACH.

Abstract

In the finitely repeated prisoners’ dilemma game, the subgame perfect Nash equilibrium outcome is that players defect at every stage. However, in prisoners’ dilemma game experiments and in real-life situations where individuals have finite interactions with each other, it is observed that individuals do cooperate with each other. A possible explanation for this discrepancy is that players have incomplete information about the opponent’s options. This paper shows that cooperation can occur when both players are uncertain about the opponent’s rationality and believe with some probability that the opponent can only play the tit-for-tat strategy. Factors that can improve cooperation between players are analysed. This paper also discusses the application of the incomplete information prisoners’ dilemma game model to international trade. This is in view of the increasing importance of international trade with globalisation which is evident in the widespread negative effects of the recent US-China trade war.