Chapter 10 covers the basics of game theory and then applies the theory to explain the workings of oligopolistic markets. We begin with the study of Nash equilibrium in one-shot, simultaneous-move games. We show that the resulting payoffs are sometimes lower than would arise if players colluded. The reason higher payoffs cannot be achieved in one-shot games is that each participant has an incentive to cheat on a collusive agreement. In many games, what primarily motivates firms to cheat is the fact that cheating is a dominant strategy. Dominant strategies, when they exist, determine the optimal decision in a one-shot game.

We also examine solutions to games that are infinitely repeated. The use of trigger strategies in these games enables players to enter and enforce collusive agreements when the interest rate is low. By adopting strategies that punish cheaters over long periods of time, collusive agreements can be self-enforcing when the game is infinitely repeated. Other factors that affect collusion are the number of firms, the history in the market, the ability of firms to monitor one another's behavior, and the ability to punish cheaters. Similar features of repeated interaction also help consumers and businesses continue trading with each other while keeping product quality high.

We conclude chapter 10 with coverage of finitely repeated games with both uncertain and known terminal periods, as well as sequential-move entry and bargaining games. When the interaction among parties is for a known time period, problems with cheating in the last period can unravel cooperative agreements that would have been supported by trigger strategies in infinitely repeated games or games with an uncertain endpoint. In sequential move games, one must determine whether the threats used to induce a particular outcome in the game are credible.