Prisoners Dilemma Flashcards
What are the applications of the Prisoners’ Dilemma?
Pricing
Cartels - Collusion
Team Production
What are the general assumptions of a Prisoners Dilemma?
It is usually symmetric (i.e. same strategies, same pay offs).
Further, it has one dominant strategy which is Pareto dominated by another more favourable outcome.
What is likely to happen in a Prisoners Dilemma?
There is a dominant strategy, play ‘confess no matter what the other will do. No other outcome can be explained if the players are rational, there cannot be any uncertainty due to guessing what the other will do.
What might the two actions A and B represent in a industrial Economy?
We could use the example of a cartel or collusion game. Also we could think of a partnership game where A represents ‘Shirk’ and B represents ‘work’.
If we want to focus on decisions which firms face then another example might be an advertising game where A would be ‘high spend’ and B would be ‘low spend’. Ultimately, we need a game with a dominant strategy and a preferable outcome (KQ, KQ) which is never reached if players select strategies based on their own pay offs.
What could firms so in an attempt to obtain a higher payoff?
If the game is repeated infinitely we said it would be possible for firms to collude by playing a ‘grim trigger’ strategy.
Begin by Playing high price
Keep playing high price as long as no player has never played low price
if one player has ever played ‘low price’ then play low price forever.
Our conclusion should be therefore that if the game is repeated and players value future payoffs enough (represented by our delta) then they can attempt to obtain a higher pay by using a grim trigger strategy.
What does the delta in the grim trigger strategy calculation represent?
Firms discount future payoffs by some factor delta where 0
Would making the game sequential change the likely outcome in a prisoners dilemma?
No ‘Confess’ is dominant no matter what the other person does. Observing his action before you take yours will not alter the outcome.
