THE FORGIVING TRIGGER STRATEGY: AN ALTERNATIVE TO THE TRIGGER STRATEGY

Miguel Aramendia (), L. Ruiz and Federico Valenciano ()
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L. Ruiz: Economia Aplicada IV, Universidad del Pais Vasco, Avda. L. Aguirre 83, Bilbao 48015, Spain

International Game Theory Review (IGTR), 2004, vol. 06, issue 02, 247-264

Abstract: The grim-trigger strategy introduced by Friedman is often used in economic models, mainly because of its simplicity, to show that collusion can be sustained by means of a subgame perfect equilibrium. In this work we show that, under simple conditions, it is possible to improve on the grim-trigger strategy while retaining subgame perfection and in some cases adding weak renegotiation proofness (in the sense of Farrell and Maskin). The basic idea is that, following a deviation, the cheater, instead of continuing in the Nash equilibrium forever, chooses an autopenalty which signals, in a very strong way, that he/she would not deviate any more if cooperation were reestablished. We check the nice working of this strategy in the Cournot's oligopoly model.

Keywords: Repeated games; trigger strategy; renegotiation proof (search for similar items in EconPapers)
JEL-codes: B4 C0 C6 C7 D5 D7 M2 (search for similar items in EconPapers)
Date: 2004
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DOI: 10.1142/S0219198904000186

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