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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 balance of payment
Tih Reply
I don't know
Somkenechukwu
balance of payment is the sum total of a country receipt for her exports and the total payments made for her imports.
dajan
discuss collusion of An oligopoly
Fikile Reply
ɧơɯ Ćąŋ ɖɛmąŋɖ Ćɧąŋɠɛ ŧơ want
henry Reply
what is money
Ngea Reply
money is everything
Pranav
a regulatory object between producer and consumer of monetary system
Vipul
money is anything generally accepted for the payment of goods and services and for the settlement of debt
Angel
a regulatory object of good and services between producer and consumer ( all these comes under monetary system)
Vipul
what is price surveillance?
Berry Reply
what is favourable balance of trade
Ngea
what is demand
Oluchi Reply
what are two classical macroeconomics and what're their theories say about their equations?
AMARA Reply
what is the formula for calculating elasticity
aza Reply
mpp÷APP
Umar
what is elasticity of demand?
Rita Reply
hello
Osanday
hi
SHERO
flexibility of demand in terms of price , income and tax ratio .
Vipul
Causes of economic growth
pierre Reply
What is elasticity of demand
pierre
What are the causes of economic growth
pierre
economic growth, establishment of industry, encourage of investor's, farm productivities, creation of institutions, construction of good road etc
Oyewale
elasticity of demand can be said to be the responsiveness of demand to a change in prices
fateemah
impact of collusion in the economy referring to inefficiencies illustrated by means of graph
nondumiso Reply
The Factor price will determine the choice of techniques to produce.Expantiate
dajan
what is elasticity of demand?
Etta Reply
state and explain two types of demand
Etta
Institution involved in money market
Gande Reply
what is Economics
Kwame Reply
Economic is the study of scarcity
Kolade
Economics is the study of a lot of things. It is split up into two areas of study, Microeconomics and Macroeconomics. Microeconomics is the study of an individual's choices in the economy and Macroeconomics is the study of the economy as a whole.
The
Economics is a science that studies human scarcity
Agnes
What is Equilibrium price?
Agnes
Equilibrium is the market clearing price. The point at which quantity demanded equals quantity supplied. The point at which the supply and demand curves intersect.
The
Equilibrium price*
The
Refers to the study of how producers use limited resources to satisfy human unlimited wants
Gatoya
why is economics important
Derrick Reply
why economics important
feleke
name four ways to encourage the development of trade amongs country
Miracle

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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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