THE FORGIVING TRIGGER STRATEGY: AN ALTERNATIVE TO THE TRIGGER STRATEGY

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.