The prisoners’ dilemma is the best-known game of strategy in social science. It helps us understand what governs the balance between cooperation and competition in business, in politics, and in social settings.
In the traditional version of the game, the police have arrested two suspects and are interrogating them in separate rooms. Each can either confess, thereby implicating the other, or keep silent. No matter what the other suspect does, each can improve his own position by confessing. If the other confesses, then one had better do the same to avoid the especially harsh sentence that awaits a recalcitrant holdout. If the other keeps silent, then one can obtain the favorable treatment accorded a state’s witness by confessing. Thus, confession is the dominant strategy (see game theory) for each. But when both confess, the outcome is worse for both than when both keep silent. The concept of the prisoners’ dilemma was developed by RAND Corporation scientists Merrill Flood and Melvin Dresher and was formalized by Albert W. Tucker, a Princeton mathematician.
2. Prisoner’s dilemma in economy
The prisoners’ dilemma has applications to economics and business. Consider two firms, say Coca-Cola and Pepsi, selling similar products. Each must decide on a pricing strategy. They best exploit their joint market power when both charge a high price; each makes a profit of ten million dollars per month. If one sets a competitive low price, it wins a lot of customers away from the rival. Suppose its profit rises to twelve million dollars, and that of the rival falls to seven million. If both are set low prices, the profit of each is nine million dollars. Here, the low-price strategy is akin to the prisoner’s confession, and the high-price akin to keeping silent. Call the former cheating, and the latter cooperation. Then cheating is each firm’s dominant strategy, but the result when both “cheat” is worse for each than that of both cooperating.
Can “prisoners” extricate themselves from the dilemma and sustain cooperation when each has a powerful incentive to cheat? If so, how? The most common path to cooperation arises from repetitions of the game. In the Coke-Pepsi example, one month’s cheating gets the cheater an extra two million dollars. But a switch from mutual cooperation to mutual cheating loses one million dollars. If one month’s cheating is followed by two months’ retaliation, therefore, the result is a wash for the cheater. Any stronger punishment of a cheater would be a clear deterrent.
The following five points elaborate on the idea:
1. The cheaters reward comes at once, while the loss from punishment lies in the future. If players heavily discount future payoffs, then the loss may be insufficient to deter cheating. Thus, cooperation is harder to sustain among very impatient players (governments, for example).
2. Punishment will not work unless cheating can be detected and punished. Therefore, companies cooperate more when their actions are more easily detected (setting prices, for example) and less when actions are less easily detected (deciding on nonprice attributes of goods, such as repair warranties). Punishment is usually easier to arrange in smaller and closed groups. Thus, industries with few firms and less threat of new entry are more likely to be collusive.
3. Punishment can be made automatic by following the strategies like “tit for tat.” This idea was popularized by University of Michigan political scientist Robert Axelrod. Here, you cheat if and only if your rival cheated in the previous round. But if rivals’ innocent actions can be misinterpreted as cheating, then tit for tat runs the risk of setting off successive rounds of unwarranted retaliation.
4. A fixed, finite number of repetitions are logically inadequate to yield cooperation. Both or all players know that cheating is the dominant strategy in the last play. Given this, the same goes for the second-last play, then the third-last, and so on. But in practice we see some cooperation in the early rounds of a fixed set of repetitions. The reason may be either that players do not know the number of rounds for sure, or that they can exploit the possibility of “irrational niceness” to their mutual advantage.
5. Cooperation can also arise if the group has a large leader, who personally stands to lose a lot of outright competition and therefore exercises restraint, even though he knows that other smaller players will cheat. Saudi Arabia’s role of “swing producer” in the OPEC cartel is an instance of this.
3. Example of prisoner’s dilemma in actual situation
Major Mobile Phone Companies in the Prisoner’s Dilemma ( The Mobile OS Wars)
„In today’s world, technology is an ever-growing part of the population’s daily life. Since Martin Cooper and Motorola invented the first mobile phone in 1973, mobile technology has been rapidly developing. The last two decades have yielded rapid changes in mobile technology. Research in Motion (RIM) dominated the mid-2000s with Blackberry Smartphones, but in 2007, Apple changed the world as we know it today. The iPhone revolutionized the mobile device market with its capacitive touch screen and powerful internet capabilities. It was the mobile device to be able to view full internet pages. Apple invented the iPhone and its other mobile devices because it believed that the world was starting to enter the “post-PC” era (Topolsky), in which the bulk of our daily computing is completed on a handheld device rather than a desktop and keyboard. Google purchased the start-up company Android in 2005 to build its mobile portfolio because it believed that “wireless [was] the next frontier in search” (Elgin). Both companies had different reasons for investing in mobile technology, but both revolutionized the cell phone and other mobile technology as we knew it. During this time, Microsoft and RIM dominated the mobile market, but both knew that the playing field was about to change.
Once the iPhone took off in 2007 and Android soon thereafter, Microsoft and RIM entered into the prisoner’s dilemma aspect of game theory. The diagram below has 0’s and 1’s. 0 represents a business decision to not develop a new mobile operating system (OS) and stick to the business’s current business platform whereas a 1 represents the decision to move forward and develop a new mobile OS. Prior to the 2005 purchase of Android, one can argue that all four companies were in Nash Equilibrium at (0,0). With the release of IOS and Android, Apple and Google both moved into the row Develop new Mobile OS while Microsoft and RIM were stuck in the Stick to the current business platform column. Microsoft and RIM’s decision allowed Apple and Google to cannibalize the mobile technology market. In 2010, Microsoft looked to move back into Nash Equilibrium with Apple and Google by releasing its new revamped mobile OS Windows Phone 7 (Carmody). The first Windows Phone 7 phones arrived November 8, 2011. Although Microsoft at least made steps forward to try to reenter Nash Equilibrium, it still could not regain its lost market share and the company struggles today to create momentum for its mobile phone platform. RIM on the other hand, waited until 2011 to even announce its new competitive mobile operating system, Blackberry 10, (Molen) and it has yet to be released. Phones are projected to reach carriers Q4 of 2012 or more likely Q1 of 2013. This move is RIM’s hope that it can reach Nash Equilibrium with the other three platforms and hit (1,1). In my opinion, Microsoft entered the game late and will always suffer for it, but RIM is to the point of no return. RIM needed to recognize in 2005 when Google purchased Android that changes needed to be looked into. In 2007, when Apple announced the iPhone, RIM needed to invest in revamping their mobile operating system that same day if they had any hopes of clinging onto their dominating market share. Now, RIM only clings onto some of its corporate clients and a handful of general public users who are dependent on the classic Blackberry keyboard. More Apple and Google phones are becoming government, corporate and military certified. In my opinion, it is only a matter of time before RIM goes bankrupt or sells it for its Blackberry Enterprise Server. All in all, the battle for mobile device market share created a real-world example of the prisoner’s dilemma for the major phone companies.”
- Barylick, Chris. “RIM, BlackBerry 10 and Its More Passionate Competitors.” RIM, BlackBerry 10 and Its More Passionate Competitors. N.p., N.d. Web. 30 Sept. 2012. <http://www.sdtimes.com/blog/post/2012/09/29/RIM-BlackBerry-10-and-its-more-passionate-competitors.aspx>.
Carmody, Tim. “Microsoft Announces First Windows Phone 7 Handsets.” Wired.com. Conde Nast Digital, 11 Oct. 2010. Web. 30 Sept. 2012. <http://www.wired.com/gadgetlab/2010/10/windows-phone-7-3/>.
- Elgin, Ben. “Google Buys Android for Its Mobile Arsenal.” Bloomberg Businessweek. Businessweek.com, 16 Aug. 2005. Web. 30 Sept. 2012. <http://www.businessweek.com/stories/2005-08-16/google-buys-android-for-its-mobile-arsenal>.
- Hartung, Adam. “Google’s Big Mistake – Buying Motorola to Save Android.” Forbes. Forbes Magazine, 18 Aug. 2011. Web. 30 Sept. 2012. <http://www.forbes.com/sites/adamhartung/2011/08/18/googles-big-mistake-buying-motorola-to-save-android/>.
- Topolsky, Joshua. “Editorial: It’s Apple’s ‘post-PC’ World — Were All Just Living with It.” Engadget. N.p., N.d. Web. 30 Sept. 2012. <http://www.engadget.com/2011/03/03/editorial-its-apples-post-pc-world-were-all-just-living/>