prisoner's dilemma

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Related to Prisoners dilemma: Nash equilibrium

Prisoner's Dilemma

A classic problem in game theory. In the problem, two suspects are arrested and questioned separately by police. If one accuses the other while the other remains silent, the accuser will go free and the silent party will go to jail for 10 years. If each accuses the other, both go to prison for five years. If both remain silent, they only go to jail for one year. According to the dilemma, the rational response for each of the prisoners is to accuse the other (maximizing the possibility each will go free), even though this produces an irrational result (that both go to jail for five years).

The prisoner's dilemma is used to explain a variety of economic and political phenomena when all parties involved are self-interested, rational and have imperfect information. For example, two companies may compete for a promising employee. They offer increasingly attractive salaries. If one company gives up, the other company will take the employee. So both quite rationally increase the offers. This however could produce the irrational result that a new employee is paid too highly. The prisoner's dilemma seeks to explain why rational actions sometimes lead to irrational conclusions.

prisoner's dilemma

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The classic textbook example of a Prisoners Dilemma situation is that of a price war between two competitors.
In fact, as an outcome this case exactly mirrors the standard Prisoners Dilemma outcome--neither of the competing firms is able to carve out an advantage over the other, in fact they are only able to increase their subscribers by poaching them from other smaller competitors.
This service war ended when both realized the futility of this Prisoners Dilemma type situation and came to a compromise agreement after which both companies are aware what their competitor's strategy is in this instance.