Trigger Strategy

Published Sep 8, 2024

Definition of Trigger Strategy

Trigger strategy is a concept in game theory, particularly in the context of repeated games. It refers to a strategy that specifies a certain “trigger” event, typically a deviation from a cooperative or agreed-upon course of action by another player, which prompts a response. Once this trigger is activated, the player employing the trigger strategy will alter their strategy, often moving to a less cooperative stance, such as punishing the deviating player to deter non-cooperative behavior.

Example

Consider two firms, Firm A and Firm B, that operate in a duopoly market and have informally agreed to keep prices high to maximize their profits. Each firm faces a dilemma: they can either maintain the high price (cooperate) or undercut the other firm’s price to gain a larger market share (defect). Assume they agree to maintain high prices, but each firm knows that if one defects (triggers the event), the other will retaliate by permanently lowering its price (trigger strategy).

Firm A and Firm B are content with high prices, maximizing joint profits. One day, Firm A decides to lower prices to capture more market share. Firm B observes this deviation (trigger event) and responds by cutting its prices too, not just temporarily but permanently. This mutual price reduction leads to lower profits for both firms in the future, illustrating the punishment aspect of the trigger strategy.

Why Trigger Strategy Matters

Trigger strategy is crucial in understanding how cooperation can be sustained in repeated interactions or strategic settings. In competitive markets, trigger strategies help explain how firms or players maintain collusive outcomes without formal agreements. This strategy enforces cooperation by making deviation less attractive due to the threat of retaliation or punishment. Understanding trigger strategies can help policymakers design better regulations to promote competitive behavior and prevent tacit collusion.

For businesses, recognizing the dynamics of trigger strategies allows them to navigate competitive landscapes more effectively, fostering sustainable cooperation and deterring unprofitable price wars or other destructive competitive behaviors.

Frequently Asked Questions (FAQ)

How does the length of the game affect the effectiveness of a trigger strategy?

The effectiveness of a trigger strategy is significantly influenced by the length of the game. In infinitely repeated games or games with an indefinite end, trigger strategies are more effective because players are always considering the long-term repercussions of their actions. Since the future consequences of deviating from an agreed-upon strategy are enduring, the threat of punishment is a stronger deterrent.

Conversely, in finitely repeated games with a known end point, trigger strategies become less effective as the game approaches its conclusion. Players may be tempted to deviate in the final stages since there is limited opportunity for the trigger strategy to enforce long-term punishment. Hence, the longer or more indefinite the series of interactions, the more powerful the trigger strategy becomes in maintaining cooperative behavior.

Can trigger strategies apply to non-economic contexts?

Yes, trigger strategies are not limited to economic contexts and can be applied to various scenarios involving repeated interactions and strategic decision-making. For instance, in political negotiations, international relations, or environmental agreements, trigger strategies can enforce cooperation by stipulating consequences for non-compliance.

In personal relationships, individuals may employ trigger strategies by altering their behavior if a partner deviates from agreed norms or expectations. Essentially, any repeated interaction where trust and cooperation are essential, and where defection can be punished, can see trigger strategies at play.

Are there any limitations or challenges associated with implement trigger strategies?

While trigger strategies can effectively enforce cooperation, they do have limitations and challenges. One major limitation is the requirement for perfect monitoring or reliable detection of deviations. In many practical situations, it might be difficult to accurately observe or verify whether the other party has deviated from the agreement, complicating the implementation of trigger strategies.

Another challenge is the potential for miscommunication or misunderstanding. A mistaken belief that the other party has defected when they have not can lead to unnecessary punitive actions, damaging long-term cooperation. Moreover, the severity of punishment inflicted by the trigger strategy may sometimes be excessive, leading to mutually detrimental outcomes rather than corrective measures. Hence, while powerful, trigger strategies require careful consideration of enforcement mechanisms and clarity in the terms of cooperation.