Prisoner's dilemma
The prisoner's dilemma is a fundamental concept in decision theory that highlights the challenges individuals or organizations face when making choices between cooperation and self-interest. It is typically illustrated through a scenario involving two parties who must decide whether to betray each other or work together. The optimal collective outcome occurs when both parties choose to cooperate, resulting in a lesser penalty for each. However, if both act solely on self-interest, they may end up worse off than if they had worked together. This dilemma is particularly relevant in fields such as economics, where it applies to oligopolies—markets dominated by a few companies whose decisions are interdependent. For example, companies like Coca-Cola and Pepsi can benefit from coordinating their strategies rather than undermining each other through aggressive competition. The concept also extends to international relations, where countries might face similar choices regarding cooperation versus conflict. Overall, the prisoner's dilemma serves as a powerful illustration of the potential benefits of collaboration in various contexts, underscoring the complexities of decision-making in competitive environments.
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Prisoner's dilemma
The prisoner’s dilemma is a concept in decision analytics with applications in business, economics, and political science. It holds that an optimal individual outcome cannot always be achieved when two people or organizations act to advance their own self-interests at the expense of the other. Presented as a paradox, the classic construction of the prisoner’s dilemma examines a hypothetical situation in which two parties are given the choice to safeguard their own interests at the detriment of the other party. Following the consequences of each decision through to their logical conclusions, the prisoner’s dilemma results in both parties finding themselves in a less desirable position than they would have been in had they elected to work together.
In essence, the prisoner’s dilemma can be reduced to a simple principle: when two parties face decisions that involve a choice between cooperating or protecting one’s own self-interests at the expense of the other party, cooperation can lead to a better overall outcome and acting in self-interest can lead to an unfavorable overall outcome.
Background
In economics, the prisoner’s dilemma is most readily applied to oligopoly situations, in which a single market is largely or entirely controlled by a limited and relatively small number of companies. For example, Coca-Cola and Pepsi have historically dominated the cola market, while restaurant chains like McDonald’s, Burger King, and Wendy’s long held a functional oligopoly over the fast-food hamburger market. Unlike most other structures, the companies that participate in oligopolies are subject to high levels of interdependence. The decisions made by one company can profoundly affect all the other companies with a stake in the market, leading modern economists to develop a theoretical model that attempts to systematize correct approaches to decision-making by applying game theory to oligopoly situations.
Game theory draws on mathematical modeling to analyze situations in which multiple participants (also called players) make rational decisions that generate complex strategic exchanges that impact all other participants. In its economic applications, game theory typically focuses on how one company’s market decisions affect its financial outcomes. By tracking the ultimate consequences of all possible decisions a company could have made, game theory reveals that certain strategies tend to generate better financial results than others when applied to oligopoly market structures.
These models are further informed by a related concept forwarded by the American mathematician John Forbes Nash Jr. (1928–2015), who developed what is now known as the Nash equilibrium. In game theory, the Nash equilibrium occurs when all participants have made their decisions and every participant is happy with the outcome of their decision, given the new conditions created by the sum results of all participants’ choices. Thus, in a Nash equilibrium, no participant has an incentive to alter their choice and all participants have achieved the best possible results. In theory, oligopoly market structures are optimized when all stakeholder companies work toward achieving a Nash equilibrium.
The Nash equilibrium model has proven highly influential. Nash was awarded the 1994 Nobel Prize in economics for his work, which also became the subject of the Academy Award-winning 2001 film A Beautiful Mind.
Overview
The earliest versions of the concept behind the prisoner’s dilemma were developed in the 1950s by the mathematicians Melvin Dresher (1911–1992) and Merrill Flood (1908–1991), who worked for the RAND Corporation nonprofit think tank. Princeton University mathematics professor Albert W. Tucker (1905–1995) is credited with formalizing Dresher and Flood’s foundational work into the easily understood form of a moral or logical quandary.
In the standard iteration of the original prisoner’s dilemma, two people, “John” and “David,” are arrested for a crime. The police place them in separate interrogation rooms. John and David are both given two choices: either admit to committing the crime or say nothing. Specific consequences will follow from each choice, and each individual choice will affect both men in different ways. If John and David both choose to say nothing, they will each receive a one-year prison sentence. If both John and David admit their guilt, they will each receive a three-year prison sentence. If John confesses and David says nothing, David will get a five-year prison sentence and John will be set free. John faces the same five-year sentence if he says nothing and David confesses and goes free.
The dilemma is structured so that John and David both stand to achieve a more advantageous result with less risk by cooperating rather than turning on each other. For instance, consider the dilemma from John’s point of view. If he says nothing, he is guaranteed to go to prison for at least one year. Thus, this option presents John with a higher degree of theoretical risk than confessing, as he will go free if he confesses and David does not. Admitting guilt also guarantees John that he will avoid the longest possible jail sentence of five years. However, John can only achieve this outcome by acting out of pure self-interest rather than cooperating with David. In analyzing the scenario from an objective standpoint that considers both John and David’s best interests, the optimal outcome involves each receiving the lightest possible sentence of one year. Yet, this resolution is only possible if John and David cooperate with one another and accept an outcome that requires a degree of personal sacrifice for both parties to achieve the greater good.
The prisoner’s dilemma has no correct answer. It simply aims to illustrate that in some situations, cooperating rather than competing leads to a more desirable overall outcome than would have been achieved if all parties had acted solely to protect their own interests.
Following its popularization through the work of Dresher, Flood, and Tucker, the prisoner’s dilemma was refined and expanded through the contributions of other mathematicians and theorists. In business, the prisoner’s dilemma illustrates that all companies operating in an oligopoly market structure often stand to gain more by acting cooperatively than competitively. Two companies that operate in an oligopoly often stand to optimize their profits by setting similar price points and sharing the market rather than one company reducing its prices to win business away from its competitor but diminishing the amount of money they generate in the process.
Beyond oligopoly economics, the prisoner’s dilemma has found applications in political science, particularly with regard to foreign policy and international cooperation. In some situations, nations may be reluctant to cooperate with one another, but it may also be in their best interests to do so given the possibility of undesirable consequences arising from choices of self-interest that could lead to wider military conflicts or economic instability.
Bibliography
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Kamer, Gordon. “Hyper-Partisans and the Prisoner’s Dilemma.” Harvard Political Review, 4 Nov. 2018, harvardpolitics.com/united-states/hyper-partisanship-and-the-prisoners-dilemma/. Accessed 23 Apr. 2019.
Kenton, Will. “Prisoner’s Dilemma.” Investopedia, 11 Feb. 2019, courses.lumenlearning.com/wm-microeconomics/chapter/prisoners-dilemma/. Accessed 23 Apr. 2019.
Peterson, Martin. The Prisoner’s Dilemma. Cambridge UP, 2015.
Poundstone, William. Prisoner’s Dilemma. Knopf Doubleday Publishing, 2011.
“Power and Politics—The Prisoner’s Dilemma.” The University of North Carolina at Chapel Hill, europe.unc.edu/iron-curtain/power-and-politics-the-prisoners-dilemma/. Accessed 23 Apr. 2019.
“Prisoner’s Dilemma.” Lumen Learning: Microeconomics, courses.lumenlearning.com/wm-microeconomics/chapter/prisoners-dilemma/. Accessed 23 Apr. 2019.
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