Prisoner's Dilemma Case Study

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5. Solutions to the Prisoner’s Dilemma The previous part of the chapter elaborated a bit about how the prisoner’s dilemma can be solved in cartels. This chapter goes deeper into further solutions for the prisoner’s dilemma in game theory in general. These solutions include repeating the games, enforcing penalties and rewards and includes how players can make strategic moves to solve the dilemma. 5.1. Repetition 5.1.1. Repeated Games Overview So far, we have seen how cooperation between two prisoners can increase both of their profits, but this cooperation is not likely to happen if the game is only played once. However, if the players know that the game is going to be repeated, cooperation is more likely. Although some prisoners may only have to face the decision of whether to confess or deny (or maybe cooperate or defect) only once, most of the other real life prisoner dilemmas include firms having to face these decisions of cooperating and defecting over and over again, and in this case of “repeated games”, the dilemma becomes more complicated because how you choose to act as a firm affects how the other firm acts in the coming games. And so in this case, every firm considers the fact that only one instance of defecting might cause the other firm to defect as well which results in the collapse of cooperation in the future. And if the value of future cooperation exceeds the value of defecting now, then both firms will be implicitly compelled to keep choosing to cooperate. (Dixit, et.al 2009: 399, 400; Salvatore, 2007: 425) Suppose you are player 1 in the prisoner’s dilemma and that you and player 2 understand that of you both charge a higher price (as in cooperate with each other), then you will both get a higher value than if b... ... middle of paper ... ...w it can be a solution, let’s go back to the example mentioned in third chapter of the husband and the wife and the cost of penalty to the player that defects. If one of the players does not cooperate, they get 1 year in prison and the other player that cooperates 25 years in prison. But suppose that upon leaving the prison after 1 year, the defector gets beat up by the friends of the prisoner that cooperated, and this physical penalty ends up being the same as 20 years in prison. So by adjusting the payoffs as illustrated in the payoff matrix shown in Figure 5.1, the payoff of the defector would be 21 years instead of 1 year and the payoff of the cooperator remains 25 years. In this case, the game changes completely and the prisoner’s dilemma is now a game of assurance, where none of the players have dominant strategies anymore but both find it best to cooperate.

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