Repeated interactions in a duopoly influence market outcomes by enabling firms to establish collusive arrangements that sustain prices above marginal cost, thereby leading to higher profits compared to single interactions that often result in competitive pricing. The threat of reverting to a Nash equilibrium of marginal cost pricing serves as a deterrent against deviation, promoting cooperative behavior over time. In contrast, a single interaction generally results in price wars and zero economic profits due to the incentive to undercut rival prices .

When firms compete once in a Bertrand-like duopoly with homogenous goods, the Nash equilibrium occurs when both firms set the price at the level of marginal cost, c. Since any firm undercutting its rival can capture the entire market, both firms will continue to lower their prices until they cannot profitably do so anymore, which happens when the price equals marginal cost. This results from the incentive to capture the market share, thus leading to zero economic profit in equilibrium .

In sequential games, discounting future payoffs influences leader-follower strategies by affecting the perceived value of future benefits relative to immediate gains. A lower discount factor reduces the attractiveness of future payoffs, encouraging players to prioritize current utility and act aggressively (or myopically), while a higher discount factor makes future rewards more appealing, potentially leading to more cooperative or strategic patience. This dynamic alters the feasibility of maintaining equilibria reliant on future compensations, as followers anticipate the leader’s decreased inclination to uphold strategies with delayed advantages. The anticipation of leader's responses and their commitment level shapes follower strategies in long-term interactions .

Market structure plays a crucial role in sustaining monopoly profits in repeated games by influencing the degree of firm coordination and strategic interdependencies. In highly concentrated markets with few firms (oligopolies), repeated interactions facilitate tacit collusion, enabling firms to maintain prices significantly above competitive levels. Barriers to entry and product homogeneity increase the likelihood of sustaining these profits, as firms are able to monitor and punish deviations effectively. Conversely, in fragmented markets or those with low entry barriers, sustaining such profits becomes more challenging due to the complications in coordinating actions and detecting undercutting strategies .

Firms can sustain monopoly profits in an infinitely repeated game if the discount factor, δ, is sufficiently high. Specifically, δ must be high enough to make the future profits from ongoing collusion more valuable than the immediate gain from undercutting a competitor. This can be formalized as δᵀ > (1-δ)πₘ > πₖ, where πₘ is the monopoly profit and πₖ is the competitive profit. Essentially, when δ is greater than the critical discount factor, firms are incentivized to maintain higher prices because the value of consistent future profits outweighs short-term gains from deviation .

A dynamic game is represented in normal form by listing all possible strategies for each player and their respective payoffs. The normal form highlights strategic interdependencies by displaying the outcomes (payoffs) resulting from combinations of players' strategies. From this form, one can determine Nash equilibria by identifying strategy sets where no player benefits from unilaterally deviating. This representation helps reveal whether all Nash equilibria are plausible, i.e., if any rely on non-credible threats or promises, which would not be sustainable in subgame perfect Nash equilibria .

Determining Nash equilibria in extensive form games presents challenges such as accounting for the informality and sequencing of players' decisions and the complexity of strategy profiles. These are addressed by converting the extensive form game into its normal form via enumeration of comprehensive strategies for each player, accommodating the order of moves and information available at each decision point. Solutions leverage backward induction and the concept of subgame perfection to ensure equilibria are credible within every subgame. This addresses issues of non-credible threats and assists in coordinating expectations through explicit decision paths .

Price competition models, such as the Bertrand model, predict zero economic profits for firms in equilibrium when there are no capacity constraints, and firms sell homogenous goods. Under this scenario, firms have an incentive to undercut each other to capture the entire market, driving prices down to marginal cost levels. In the absence of pricing power or product differentiation, this competitive pressure results in zero economic profits in equilibrium because prices equate to production costs .

In sequential games with successive decision-making, strategies form a subgame perfect Nash equilibrium if they are Nash equilibria in every subgame of the original game. Players choose their strategies considering both current and future actions; hence, the equilibrium strategies often involve backward induction. Each player anticipates the reactions of subsequent players and selects an optimal strategy accordingly, ensuring that their current choice is optimal given future interactions. This involves identifying credible paths of play that prevent deviations .

In a repeated game played twice, where players observe the first play, the pure strategy subgame perfect Nash equilibria involve players selecting strategies that yield Nash equilibria in each subgame while considering future payoffs. Since future payoffs are not discounted, the players will choose strategies that secure a Nash equilibrium in the first play and replicate actions that lead to equilibrium in the second play based on observed actions. This may involve strategies such as playing a1 and b1 in the first round followed by a1 and b1 in the second round if both players observed each other selecting a1 and b1 in the initial round .