Switching costs in frequently repeated games

We add small costs of changing actions and frequent repetition to finitely repeated games, making some surprising commitments credible. Naturally, switching costs make it credible not to change action. However, this can occur for small switching costs and gives a unique subgame perfect equilibrium in coordination games when Pareto dominance and risk dominance coincide. In the Prisoners' Dilemma, switching costs reduce the incentive to deviate from mutual cooperation, but reduce the incentive to switch from cooperation to punish defection. Hence whether switching costs enable cooperation depends on which effect dominates. Switching costs can make complex threats credible enabling a player to earn more than his Stackelberg payoff. (C) 2000 Academic Press.