Question

Provide a clear business example of prisoner's dilemma.
- How do you overcome prisoner's dilemma?

Answer 1

The prisoner's dilemma is a paradox in decision analysis in which two individuals acting in their own self-interests do not produce the optimal outcome. The typical prisoner's dilemma is set up in such a way that both parties choose to protect themselves at the expense of the other participant.

Consider the case of Coca-Cola versus PepsiCo, and assume the former is thinking of cutting the price of its iconic soda. If it does so, Pepsi may have no choice but to follow suit for its cola to retain its market share. This may result in a significant drop in profits for both companies.

A price drop by either company may, therefore, be construed as defecting, since it breaks an implicit agreement to keep prices high and maximize profits. Thus, if Coca-Cola drops its price but Pepsi continues to keep prices high, the former is defecting while the latter is cooperating (by sticking to the spirit of the implicit agreement). In this scenario, Coca-Cola may win market share and earn incremental profits by selling more colas.

Traditionally, the most effective option for overcoming a prisoner's dilemma is the tit for tat strategy, in which you start out cooperating and then replicate whatever the other player's last move was. So if he cooperates, you do the same, if not, you retaliate.

other ways to overcome prisoner's dilemma are-

1 – Communication

In the normal definition of the problem the two prisoners are not able to communicate with each other. One way out of the problem is if the two can find a way to talk to each other and agree their course of action. Of course, even with this there is the risk that one will not stick to the agreement. To enforce the agreement may need one of the other tactics.

2 – Threats

If threats can be introduced into the game then the payoff for players that don’t co-operate can be lowered so that there is an incentive to co-operate. An example is if the two prisoners were members of the mafia. They know that whilst they could avoid a prison sentence by betraying the other prisoner they will be punished when they get out of prison. This makes it a better option to co-operate and serve a shorter prison sentence.

3 – Rewards

Similar to the idea of threats, rewards can be used to change the payoffs in the game. If there is a reward for co-operation then this can become the better strategy for the players to follow.

4– Bring in a third party

If there is a third party that both the prisoners trust then the may be able to convince both the players to co-ordinate their behavior to get a better result.