Demons and repentance (Q1100103)

This paper presents a new explanation for the stability of cartels. For a large class of repeated Cournot duopoly games with discounting, strategies are constructed which have the property that cheating on the cartel is followed by repentance. It is shown that these repentance strategies are subgame perfect equilibrium strategies and that in the presence of demons (infrequently irrational behavior on the part of both players), they lead to Pareto superior expected discounted payoffs in comparison with either Friedman's trigger strategies or Abreu's ``stick and carrot'' strategies.