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Two co-conspiratorial criminals are arrested. When they are taken to the police station, they refuse to say anything and are put in separate interrogation rooms. 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. So 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. Why don’t you get smart? If you confess, too, we’ll cut your jail time down to five years, and your partner will get five years, also.” 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.

The game theory situation facing the two prisoners is shown in [link] . To understand the dilemma, first consider the choices from Prisoner A’s point of view. If A believes that B will confess, then A ought to confess, too, so as to not get stuck with the eight years in prison. But if A believes that B will not confess, then A will be tempted to act selfishly and confess, so as to serve only one year. The key point is that A has an incentive to confess regardless of what choice B makes! B faces the same set of choices, and thus will have an incentive to confess regardless of what choice A makes. Confess is considered the dominant strategy or the strategy an individual (or firm) will pursue regardless of the other individual’s (or firm’s) decision. The result is that if prisoners pursue their own self-interest, both are likely to confess, and end up doing a total of 10 years of jail time between them.

The prisoner’s dilemma problem
Prisoner B
Remain Silent (cooperate with other prisoner) Confess (do not cooperate with other prisoner)
Prisoner A Remain Silent (cooperate with other prisoner) A gets 2 years, B gets 2 years A gets 8 years, B gets 1 year
Confess (do not cooperate with other prisoner) A gets 1 year, B gets 8 years A gets 5 years B gets 5 years

The game is called a dilemma because if the two prisoners had cooperated by both remaining silent, they would only have had to serve a total of four years of jail time between them. If the two prisoners can work out some way of cooperating so that neither one will confess, they will both be better off than if they each follow their own individual self-interest, which in this case leads straight into longer jail terms.

The oligopoly version of the prisoner’s dilemma

The members of an oligopoly can face a prisoner’s dilemma, also. If each of the oligopolists cooperates in holding down output, then high monopoly profits are possible. Each oligopolist, however, must worry that while it is holding down output, other firms are taking advantage of the high price by raising output and earning higher profits. [link] shows the prisoner’s dilemma for a two-firm oligopoly—known as a duopoly    . If Firms A and B both agree to hold down output, they are acting together as a monopoly and will each earn $1,000 in profits. However, both firms’ dominant strategy is to increase output, in which case each will earn $400 in profits.

Questions & Answers

what is production?
Elizabeth Reply
under what condition will demand curve slope upward from left to right instead of normally sloping downward from left to right
Atama Reply
how i can calculate elasticity?
Tewekel Reply
What is real wages
Emmanuella Reply
what are the concept of cost
Tabitha Reply
what is the difference between want and choice
Grace Reply
Want is a desire to have something while choice is the ability to select or choose a perticular good or services you desire to have at a perticular point in time.
substitutes and complements
Amman Reply
Substitute are goods that can replace another good but complements goods that can be combined together
account for persistent increase in lnflation
niwahereza Reply
what is opportunity cost
Adebowale Reply
opportunity cost reffered to as alternative foregone when choice is made
government measures to control inflation?
Formu Reply
control populationk growth rate by using family planning to reduce faster increase of people than job creation
how do we calculate the firm's profit maximizing output in the short run given marginal cost ,average cost and average variable costs?
Nomuhle Reply
what is employment?
Ahmarh Reply
what is meant by broadening the tax base?
Fiona Reply
What is scarcity.
Npoanlarb Reply
when there is adequate resources
the represent inadequacy of resources relative to the needs of individuals
scarcity is the unavailability of resources to attain unlimited wants and needs of people
for exam land and money
hi negi
Scarcity in economics means resources are limited supply or insufficient to satisfy all human wants.
scarcity means limited resources
scarcity means limited supply of resources relative to human wants
why our wants are limited
Npoanlarb Reply
nooo want is unlimited but resources are limited
and do to that there occurs scarcity and we have to make choice in order to have what we need if need be I will explain more
our wants are not limited but rather the resources
as we know that there are two principle of microeconomics scarcity of resources and they have alternative uses...
yes .....
because our resources are limited./we have a limited resources.
our wants are not limited. because always the desire for something always arises. our means are rather limited and our wants are unlimited
because always the desire for...

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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