What is a Prisoner’s Dilemma?

//What is a Prisoner’s Dilemma?
What is a Prisoner’s Dilemma? 2017-10-09T07:10:07+00:00

Definition: Prisoner’s dilemma is a commonly applied concept in economics and game theory where one person will deceive another for the promise of a better result.

What Does Prisoner’s Dilemma Mean?

What is the definition of prison’s dilemma? The police arrest two individuals, who are separately given the option to betray their partner. Hence, there are three possible scenarios: A testifies and B remains silent, so A gets 3 years; A and B testify, and they get 2 years each; A and B remain silent, and they get a year each. Based on the outcomes, both individuals should remain silent.

The prisoner’s dilemma holds that each individual will betray their partner for a better outcome, but eventually they face the worst case scenario. In business, this dilemma demonstrates that personal interest leads to a worse financial result.

Let’s look at an example.

Example

Firm A competes against firm B. Both firms need to decide whether to advertise or not. In their industry, advertising is important not in terms of increasing revenues, but mostly in terms of inducing customers to switch between products of different firms.

  1. Scenario 1: If both firms advertise, each firm will earn $2 million.
  2. Scenario 2: If firm A advertises and firm B does not firm A will earn $10 million.
  3. Scenario 3: If neither firm advertises, each firm will earn $12 million.

So, should the firms advertise or not?

Firm B
Strategy Advertise Don’t Advertise
Firm A Advertise $2, $2 $10, $0
Don’t Advertise $0, $10 $12, $12

 

We would expect that both firms will advertise so that they induce their customers to choose their products. However, it seems that the decision that maximizes profits is the decision not to advertise. Based on the prisoners’ dilemma, even if both firms agree not to advertise, each firm will be intrigued to cheat on the agreement in order to maximize their profits. At the end of the day, though, they will both realize that the best decision was to cooperate.

Summary Definition

Define Prisoner’s Dilemma: Prisoner’s dilemma means a scenario where one prisoner will disclose information about the other for a lessor sentence.