And again, I guess you sort of get the message,

again the equilibrium of this game is going to be for the contractor to deliver

low quality for the Organizing Committee to renegotiate the price.

We skip Month 2 because by now you figured out that basically Month 2 is

going to look very much like Months 3, 4 and 5.

So let's go back to the very start of the game.

Month 1, surely if reputation, if a threat ever matters it would be in the

first period you play this game. Okay?

Building up a reputation is going to be most useful if you do it in period one.

But you know already in period one, in month one, that there is no cooperation in

months 2,3,4 and 5. So therefore, the threat of retaliation

in month one is not credible again. So therefore, this is how the game looks

like and this is what the outcome is going to

be in month one. So, to summarize, if we follow backward

induction, the process of looking at the end of the game and solving it and moving

it forward, we find that the contractor will deliver

low quality in all months, the organizing committee will always renegotiate a lower

price, and so, therefore, we will end up in a

suboptimal equilibrium. We will end up in a situation where

cooperation between the two parties never even gets going.

This outcome is triggered by the fact that in the last stage of the game, there's no

further threat of retaliation. Okay?

We called this the endgame effect. Even if we have a game that

goes on for a very, very long time the closer we get to the end of this game,

the more likely it is that cooperation will simply break down.