Two prisoners, A and B, suspected of committing a robbery together, are isolated and urged to confess. A prisoners’ dilemma refers to a type of economic game in which the Nash equilibrium is such that both players are worse off even though they both select their optimal strategies.. ª The outcome for a cartel is a prisoner’s dilemma with a Nash equilibrium with each member doing the best it can, given the behavior of the others. Oligopolies as a Prisoners’ Dilemma When oligopolies from a cartel in hopes of reaching the monopoly outcome, they become players in a prisoners’ dilemma T-Mobile and Verizon Example: T-Mobile and Verizon are duopolists in Smalltown The cartel outcome maximizes profits: Each firm agrees to serve Q = 30 customers Game and payoff matrix 58 ECON3014 – Strategic Interaction and Oligopoly The oligopoly market structure, more than any other, requires that firms act strategically, taking into account the decisions of their competitors, on whom they are highly inter-dependent. A Google Scholar search for “prisoner's dilemma” in 2018 returns 49,600 results. A prisoner's dilemma is a situation where individual decision makers always have an incentive to choose in a way that creates a less than optimal outcome for the individuals as a group. Game theory - Game theory - The prisoner’s dilemma: To illustrate the kinds of difficulties that arise in two-person noncooperative variable-sum games, consider the celebrated prisoner’s dilemma (PD), originally formulated by the American mathematician Albert W. Tucker. The prisoners' dilemma is a very popular example of a two-person game of strategic interaction, and it's a common introductory example in many game theory textbooks.The logic of the game is simple: The two players in the game have been accused of a crime and have been placed in separate rooms so that they cannot communicate with one another. Published on 20 Mar 2012 Two men are in custody for a crime they may or may not have committed: armed robbery. The sections below provide a variety of more precise characterizations of the prisoner's dilemma, beginning with the narrowest, and survey some connections with similar games and some applications in … The prisoners’ dilemma is a classic example of a game which involves two suspects, say P and Q, arrested by police and who must decide whether to confess or not. It was originally framed by Merrill Flood and Melvin Dresher while working at RAND in 1950. The monopoly outcome is jointly rational for the oligopoly, but each oligopolist has an incentive to cheat. Understanding a Cartel as a Prisoner’s Dilemma ª A cartel is an oligopoly in which the members try to collude to behave as a monopoly by setting prices and output to maximize the collective profit. The prisoner's dilemma is a standard example of a game analyzed in game theory that shows why two completely rational individuals might not cooperate, even if it appears that it is in their best interests to do so. The Prisoners Dilemma and the Ability of Firms to Collude An oligopoly is a market consisting of a few large interdependent firms who are usually always trying to second-guess each other's behaviour. Just as self-interest drives the prisoners in the prisoners’ dilemma to confess, self-interest makes it difficult for the oligopoly to maintain the cooperative outcome with low production, high prices and monopoly prices.