Prisoner's Dilemma
What is it?
When there are two suspects of a crime, it is difficult for the police forces and detectives to figure out what to do. There are many ways to handle a situation like this. One way would be the prisoner's dilemma. In this prisoner's dilemma two suspects are interrogated in two separate rooms, each given the same offer. Once they make a decision, they can't change it. In the prisoner's dilemma, there is no discussion of what is going on with the other player.
Suspect A and Suspect B have two options confess or stay quiet. Like in all game theory situations, the outcome and success of one of the players depends on the decision made by the other player. Looking at the chart, the numbers represent the number of years the suspects will spend in jail.
If suspect A (male) confesses to the crime, his outcome will always be better than if he stays quiet. No matter what, this yields the better outcome, making it the dominant strategy. If suspect A confesses to the crime and suspect B (female) confesses to the crime as well, both will receive 5 years in jail. However, if suspect A confesses and suspect B stays quiet, he will walk away and she will receive 20 years in jail. If both suspects stay quiet, they will both receive one year in jail. The situation becomes difficult because, there is no surefire way to know that the other suspect will stay quiet. If one of them confesses to the crime and the other stays quiet, the one that confesses loses every time. In these situations, without knowing what the other player is going to do, it is best to confess to the crime. Both players usually don't trust each other. This is why the result usually ends up with both criminals confessing to the crime, thus giving them both an equal amount of time to spend in jail.
Suspect A and Suspect B have two options confess or stay quiet. Like in all game theory situations, the outcome and success of one of the players depends on the decision made by the other player. Looking at the chart, the numbers represent the number of years the suspects will spend in jail.
If suspect A (male) confesses to the crime, his outcome will always be better than if he stays quiet. No matter what, this yields the better outcome, making it the dominant strategy. If suspect A confesses to the crime and suspect B (female) confesses to the crime as well, both will receive 5 years in jail. However, if suspect A confesses and suspect B stays quiet, he will walk away and she will receive 20 years in jail. If both suspects stay quiet, they will both receive one year in jail. The situation becomes difficult because, there is no surefire way to know that the other suspect will stay quiet. If one of them confesses to the crime and the other stays quiet, the one that confesses loses every time. In these situations, without knowing what the other player is going to do, it is best to confess to the crime. Both players usually don't trust each other. This is why the result usually ends up with both criminals confessing to the crime, thus giving them both an equal amount of time to spend in jail.
This clip of Dilbert demonstrates what happens when someone doesn't confess. Dilbert believed that his colleagues wouldn't confess, which would allow them all to walk away with the light sentence. However, his colleagues confesses that Dilbert was the one who killed the man. In this way, they were able to walk away unscathed, and Dilbert was the one that got in trouble. This demonstrates the difficulty of the prisoner's dilemma; you never know what they other player is going to do.
Applied to Real Life
In business, if a company wants to lower their prices, the prisoner's dilemma can be used. Both competitive companies don't know what the other company is going to do in terms of prices. If the manager or owner of the company applies game theory in terms of the prisoner's dilemma, it may help him make a decision.
If he lowers his prices and the other company doesn't, he will get the positive outcome of getting more customers. If he doesn't lower the prices and the other company does, he loses customers. Now if both of the companies keep the same prices or lower their prices, there will be some change, but the competition will be at the same level. If the companies cooperated with each other, they would be able to both keep the high prices. In this case, the customers would have to pay the same prices either way. This is when a monopoly is created; there is no real choice. However, there are some situations in which keeping the prices low would actually help the company. Barry Nalebuff explains, "from Intel and Microsoft’s perspective, Intel wants Microsoft to be cheap because that stimulates the sales of computers. And Microsoft wants Intel to be less expensive... And so the collusive outcome in the case of complements actually is lower prices, more sales, higher profits and happier customers." The lower prices helps both companies in this case. Cooperating with the other players, as in all other prisoner's dilemma situations, will actually be more beneficial.
If he lowers his prices and the other company doesn't, he will get the positive outcome of getting more customers. If he doesn't lower the prices and the other company does, he loses customers. Now if both of the companies keep the same prices or lower their prices, there will be some change, but the competition will be at the same level. If the companies cooperated with each other, they would be able to both keep the high prices. In this case, the customers would have to pay the same prices either way. This is when a monopoly is created; there is no real choice. However, there are some situations in which keeping the prices low would actually help the company. Barry Nalebuff explains, "from Intel and Microsoft’s perspective, Intel wants Microsoft to be cheap because that stimulates the sales of computers. And Microsoft wants Intel to be less expensive... And so the collusive outcome in the case of complements actually is lower prices, more sales, higher profits and happier customers." The lower prices helps both companies in this case. Cooperating with the other players, as in all other prisoner's dilemma situations, will actually be more beneficial.
