Prisoners’ Dilemma

… a core concept in Economic Analysis and Atlas102

PrisonersDilemmaConcept description

The Economist (reference below) describes the prisoners’ dilemma as a favourite example in game theory showing why co-operation is difficult to achieve even when it is mutually beneficial.

The Economist goes on to say:

“Two prisoners have been arrested for the same offence and are held in different cells. Each has two options: confess, or say nothing. There are three possible outcomes. One could confess and agree to testify against the other as state witness, receiving a light sentence while his fellow prisoner receives a heavy sentence. They can both say nothing and may be lucky and get light sentences or even be let off, owing to lack of firm evidence. Or they may both confess and probably get lighter individual sentences than one would have received had he said nothing and the other had testified against him. The second outcome would be the best for both prisoners. However, the risk is that the other might confess and turn state witness is likely to encourage both to confess, landing both with sentences that they might have avoided had they been able to co-operate in remaining silent. In an oligopoly, firms often behave like these prisoners, not setting prices as high as they could do if they only trusted the other firms not to undercut them. As a result, they are worse off.”

Atlas topic, subject, and course

Asymmetric Information, Signaling, and Game Theory (core topic) in Economic Analysis and Atlas102 Economic Analysis.

Source

The Economist, Prisoners’ dilemma, Economics A-Z, at http://www.economist.com/economics-a-to-z/p#node-21529470, accessed 10 May 2016.

Page created by: Ian Clark, last modified 10 May 2016.

Image: Policenomics, Game theory II: Dominant strategies, at http://www.policonomics.com/lp-game-theory2-dominant-strategy/, accessed 10 May 2016.