The Chain Store Game Revisited - A Game Theoretic Approach to Insecure Exchange in the Shadow of Conflict

Sammanfattning: Long-distance trade suffers from ineffective contracting and high transaction costs. Such trade can be defined as insecure exchange as it is conducted at the mercy of the regional powers, be they involved in the exchange or otherwise in a position to affect it. A predominant power engaging in international trade will seek to minimize its transaction costs by forcing regional powers to abstain from practices that threaten the security of the exchange. In this paper, we apply a game theoretic reputation based model by Treisman (2004) and show that a game of one hegemon and two challengers can result in a deterrence equilibrium. This enables economizing on forceful upkeeping of safe long-distance trade in insecure environments. We also show by historical examples that such a deterrence equilibrium could occur in reality, should the conditions be right.