Trigger Strategies

Definition

Trigger strategies are contingent plans used in repeated games where a player responds to another player's actions with predetermined responses, often designed to enforce cooperation or deter defection. These strategies can be particularly effective in sustaining equilibrium outcomes by threatening punitive responses to uncooperative behavior. They are essential in understanding dynamics like collusion, as they help maintain cooperative agreements among players through the threat of reverting to a less favorable strategy if the agreement is violated.

5 Must Know Facts For Your Next Test

1. Trigger strategies are particularly effective in repeated games because they create an environment of mutual monitoring, where players can observe and respond to each other's actions over time.
2. In the context of collusion, trigger strategies can help enforce cooperative agreements by threatening to revert to competitive behavior if any player cheats on the agreement.
3. The effectiveness of trigger strategies relies heavily on the length of the game; the longer the game is expected to last, the more credible the threat of punishment becomes.
4. Trigger strategies can sometimes lead to suboptimal outcomes if players fear retaliation too much, causing them to avoid cooperation altogether.
5. Folk theorems highlight that trigger strategies can support a variety of payoff distributions as equilibria in repeated games, expanding the potential outcomes players can achieve through cooperation.

Review Questions

• How do trigger strategies encourage cooperation in repeated games?
  • Trigger strategies encourage cooperation by establishing a framework where players respond to each other's actions predictively. When a player defects, the strategy dictates a retaliatory response that reverts them back to less favorable outcomes. This creates an incentive for all players to cooperate initially because the cost of defection is high due to expected punishment, thus promoting sustained mutual cooperation.
• Discuss how folk theorems relate to trigger strategies and what implications this has for equilibrium payoffs in repeated games.
  • Folk theorems suggest that in repeated games, a wide range of payoff distributions can be sustained as equilibria through various strategies, including trigger strategies. This means that as long as players value future payoffs enough, they can reach and maintain agreements that might be impossible in a single interaction. Trigger strategies fit into this framework by providing a means for players to enforce cooperation and achieve preferred outcomes while deterring deviations through credible threats.
• Evaluate the role of trigger strategies in maintaining collusion among firms in an oligopoly and potential effects on market behavior.
  • In an oligopoly, firms often rely on trigger strategies to maintain collusion and avoid price wars. By agreeing on prices and threatening to revert to competitive pricing if any firm undercuts, they can stabilize their profits over time. However, this reliance on such strategies can lead to market distortions if firms prioritize short-term gains over long-term stability. If a firm perceives it can gain significantly from defection without immediate punishment, it may choose to break the collusion, potentially leading to a breakdown of cooperative behavior and increased market volatility.

Related terms

Tit-for-Tat: A specific type of trigger strategy where a player mimics the opponent's previous action, promoting cooperation by rewarding cooperation and punishing defection.

Nash Equilibrium: A situation in which players choose strategies that are optimal for them, given the strategies chosen by others, leading to stable outcomes that no player has an incentive to deviate from.

Repeated Games: Games that occur multiple times, allowing players to build strategies based on past interactions and outcomes, which can lead to different equilibria compared to one-shot games.