Home » Eng Finance » P » Punishment strategy

Punishment strategy

A strategy used in a repeated game to secure an outcome which is not a Nash equilibrium for a single play of the game. Consider the prisoners’ dilemma. The outcome is not a Nash equilibrium if the game is played only once. If the game is repeated an infinite number of times the strategy is a punishment strategy that secures the equilibrium if played by both players. The strategy rewards good behaviour (the play of ) by responding in like manner and ensuring a high pay-off, but punishes bad behaviour (the play of ) by driving the pay-off down to the Nash equilibrium level.

Reference: Oxford Press Dictonary of Economics, 5th edt.