6.1.6

The Prisoner's Dilemma

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The Prisoner's Dilemma

The Prisoner’s Dilemma is a scenario where the benefits from cooperating are larger than the benefits of pursuing self-interest.

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Game Theory

  • The Prisoner’s Dilemma is a type of game theory.
  • This is a branch of mathematics where one analyses situations in which players must make decisions and then either benefit or lose out from the decisions of other players.
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The Prisoner’s Dilemma

  • This is the scenario:
    • Two criminals are arrested. When they are taken to the police station, they refuse to say anything and are put in separate interrogation rooms.
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Prisoner A

  • Eventually, a police officer enters the room where Prisoner A is being held and says: “You know what? Your partner in the other room is confessing. Your partner is going to get a light prison sentence of just one year, and because you’re remaining silent, the judge is going to stick you with eight years in prison. If you confess, too, we’ll cut your jail time down to five years, and your partner will get five years, also.”
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Prisoner B

  • Over in the next room, another police officer is giving exactly the same speech to Prisoner B.
  • What the police officers do not say is that if both prisoners remain silent, the evidence against them is not especially strong, and the prisoners will end up with only two years in jail each.
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Why is this a dilemma?

  • If the two prisoners had both stayed silent, they would serve a total of four years in jail time between them.
    • The prisoners would be better off if they cooperate with each other and neither confesses.
    • If they pursue their own self-interest, they could receive longer jail terms.

Oligopolies and the Prisoner's Dilemma

We can use the prisoner’s dilemma to understand the behaviour of oligopolies.

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The Oligopoly version of the prisoner’s dilemma

  • If oligopolists cooperate in reducing output, then everyone can maintain high profits.
  • If an oligopolist is pursuing its own self interest, however, then they would increase its output and then earn even more profits.
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Firm A being cheated by Firm B

  • If A thinks B will cheat and increase their output, then A will also increase their output.
    • This means that both firms receive £400 in profits.
    • This is better than the profit of £200, which will happen if A doesn’t change their output levels.
    • But this is lower than the £1,000 which A would have if B stuck to their agreement.
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Firm A cheating Firm B

  • On the other hand, A could believe that B will stick to their agreement.
  • If so, they will want to take advantage of this and raise their own output.
    • This means that they will receive £1,500 in profits.
    • Their competitor, B, will only have £200 in profits.
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Evaluation

  • Overall, it is in the best interest of Firm A and Firm B to both cooperate.
  • Ultimately, however, they need to trust each other.

Jump to other topics

1Introduction to Markets

2Market Failure

3The UK Macroeconomy

4The UK Economy - Policies

5Business Behaviour

6Market Structures

7A Global Perspective

8Finance & Inequality

9Examples of Global Policy

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