A couple gets away with murder but get caught red-handed for an attempted bank robbery. The police have no proof to convict the couple on charges of murder except for making at least one of them confess on their own. The police separates the couple for interrogation. The couple doesn’t know what the other is being questioned or the responses to the questions. The matrix of payoffs is illustrated below
In the example, if both of them do not confess murder, they can only be convicted of bank robbery for which the maximum punishment is one year imprisonment. If anyone of them confess while the other does not, the one who has confessed is treated leniently and have to spend a mere three months in jail while the other will have to spend 10 years in jail. If both confess, they will get three years each in jail. Ideally, collective welfare implies both of them stick to maintaining of innocence on charges of murder. Yet the individual maximising behaviour in isolation suggests a line of confession in the hope other does not confess. There is fear in the context of information asymmetry what if the other confessed. The dominant strategy to avoid a worse off situation implies confession thus collectively worse off. Even if the prisoners are allowed to interact with each other before the decision, the conclusion remains the same. The paradox of pursuit of individual maximising behaviour resulting in collectively being worse off typifies the game of Prisoner’s Dilemma. This apocryphal story best represents the game.
Rand Corporation, in the immediate post World War II era, began investigating the applications of game theory in nuclear strategy for the emergent Cold War. In 1950, Flood and Dresher first posted the series of puzzles under the Prisoner’s Dilemma though Albert Tucker is credited with the name since he introduced the sentences as pay-offs for ease of research. John Nash too discusses a similar kind of a problem. Therefore 2020 marks 70 years of the discovery of Prisoner’s Dilemma, thus an appropriate time to deliberate its significance and relevance.
It is not just persuasive but seemed to have tremendous applications across society. Despite numerous books on cooperation, coopetition etc. Prisoner’s Dilemma often overrides any signs of cooperation in a field of stiff competition. The payoffs communally might sound better off in cooperation yet individual self-interest engenders better payoffs making it a dominant strategy though collectively they might end worse off. The answer lies in the information asymmetry. In the absence of information about the prospective action or reaction by the counterparty, an individual or a group will underpin its strategy of being ‘least worse off’. While conjectural discussions and laboratory trials have yielded mixed results, the prisoner’s dilemma is best argued through real life applications. In repeated games, lab experiments demonstrate tit for tat behaviour. If there is cooperation, every repeated action yields cooperation while a betrayal yields the same in successive games. Yet in psychology and economics lab experiments do not embody the reality. Despite a wide body of psychologists and behavioural economists depending on lab experiments for results and oversimplifying behaviour, real life observations generate sufficient inconsistencies. A question therefore is the substantiation of such comportment in real life.
The post “Advertising and Firm Value-Prisoner’s Dilemma?” highlights the conceivable incidence of Prisoner’s Dilemma in advertising decisions. Firms if all come together for an agreement to limit their advertisements would still achieve the same market share. However, the likelihood of the other gaining through chiselling makes them cautious. Therefore, they apparently recourse to higher and higher advertising. The outcome is the state of diminishing returns of advertising but it seems minimising the worst case scenario as dominant strategy.
Similarly, the post, “Prisoner’s Dilemma and Retail Promotions”, indicate the presence of such state of affairs in retail industry. The firms compete with each other to acquire customers. The process of customer acquisition necessitates offers of promotions. Yet with every increment of promotions, the marginal gain decreases. Yet in absence of promotions, there is a possibility of decrease in customer base in the presence of competitors continuing with their promotion strategies. Therefore, despite a prospective trap of Prisoner’s Dilemma, firms continue to engage in promotions. Moreover, customer loyalty is a long term build-up. Firms are reluctant for a prolonged gestation period of customer acquisition. This is because of the below average returns especially when competitors are likely minting their money.
In B-Schools, placement brochures might not add great weight to final placement offers, yet the absence of it might result in the organization being worse off. Therefore a classic prisoner’s dilemma. In effect as discussed in the piece https://swarajyamag.com/commentary/commodity-trap-tragedy-of-private-b-school-education-in-india B-Schools are being driven into a commodity trap exactly for the reason. The differentiators slowly erase reducing them to state of near perfect competition. To any organization, price independence is critical to dominate the market yet the presence of large number of competitors reduce the potential of independence in price-setting. The firms seek to differentiate from the others, yet each method is easily replicated thus a diffusion happens through the B-School ecosystem driving back the competition landscape to square one.
The piece https://swarajyamag.com/economics/blockbuster-populism highlights the pitfalls of Prisoner’s Dilemma in government decision making. Once a government or party promise a populist measure ostensibly to win elections, the others have to follow suit. Any approach to the contrary, would entail high costs at least in short to mid run thus making parties and governments reluctant to adopt policies that might sound good economics but perceivably bad politics.
A common grouse against capitalism is the widening gap in salaries between CEOs and the layers beneath. Apparently, CEOs get highly disproportionate share of monetary packages. To each firm, indubitably, profit maximization is the objective. They want to corner the large share of market share with prospective customer lock in. They obviously desire CEOs who could achieve the same and thus managements might not mind paying high compensation to those CEOs who have the talent and wherewithal to achieve the same. Moreover the pool of highly talented CEOs is limited. Once a firm manages to woo a star CEO, the others will have to follow suit by offering lucrative packages. Given the relative bargaining power, severance packages too remain high thus a win-win for CEOs but collectively a worse-off situation for the firm management. Yet the firms have no option but get drawn into Prisoner’s Dilemma.
Payoffs diverge between those opting for self-interest and those that favour collective interest. When such a divergence happen between self-interest and collective interest, the societal welfare declines. An outcome to resolve this apparent market failure is the intervention of the state. The cap on payments for players in IPL auctions represent an instance to circumvent the problems of Prisoner’s Dilemma as arisen in the instance of CEO compensation.
Ban on using drugs in sports represent an instance of government and extra-governmental intervention to preclude externalities. Sports in the past was amateur and professionalism was frowned upon. Instances abound of professionals being hounded, victimized, ridiculed or looked down in various sports. Sports was in fact the pastime of the rich, the root of Veblen formulation of luxury goods. Yet sports contests involved national pride. Therefore, states would back their athletes to try more, develop greater skill sets to ensure the victory and thus high pay-offs. This meant that athletes have to go one up over their competitors irrespective of the means and long term consequences. Ends mattered and not the means. Drug usage thus became a natural by-product of the same. It is widely believed that the Soviet success in Olympics in the cold-war era was linked to the widespread drug usage and ability to escape detection. The collective interest was served, the self-interest was served in the short run, and yet long term societal consequences were significant both for the athlete and the society. There were long term health impacts and increased probability of mortality at younger age.
A gentlemen’s agreement might happen between all players to desist from using drugs. Besides the absence of trust, given the high stakes involved, there is always a possibility of one of them using small quantum of drugs to gain an advantage over the rest. The resulting corollary is more and more athletes resorting to use of drugs thus levelling the field. In case only one uses drugs, the rest do not it will give him or her a strong advantage thus high payoffs. If everybody uses drugs, those advantages are negated with everyone on the same footing as the case might be if no drugs were to be used. The rider however, is the societal and individual consequences in terms of impact on health the drugs in all probability will have. Therefore the use of drugs will reduce the societal and individual payoffs. Since the athletes given the payoffs are unlikely to abandon the use of drugs, the central authority, the International Olympic Committee and its associate bodies ban drugs from its use in sports.
The similar principles are adopted in making safety equipment mandatory in many sports ranging from helmets in ice-hockey, protective gear in American football etc. The above observations point out towards numerous instances wherein the society invariably drags itself into Prisoner’s Dilemma. The cause is primarily the divergence between self-interest and collective interest. The market failure would have to be resolved by external interventions. However the next stage of the game would be to find ways in circumventing the barriers posed by external interventions thus leading to new stages of Prisoner’s Dilemma. The cat and mouse game continues.
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