_Basic Microeconomics_Prisoner's Dilemma.pdf

The Prisoner's Dilemma is a situation where the Pricing strategy of an oligopoly market is based.

1. BASIC
MICROECONOMICS
1
21 June 2025

2. 2
Prisoner Dilemma

3. WhatisaPrisoner’sDilemma?
oAprisoner’sdilemmaisadecision-makingand
gametheoryparadoxillustratingthattwo
rationalindividualsmakingdecisionsintheir
ownself-interestcannotresultinanoptimal
solution.
oThe paradox was developed by
mathematiciansM.FloodandM.Dresherin
1950,andthemoderninterpretationwas
conceptualizedbyCanadianmathematician
A.W.Tucker.
oTheprisoner’sdilemmamaybeexpressedas
anapproachwhereindividualpartiesseek
theirwelfareattheexpenseoftheother
party.Generally,sincebothparticipantsavoid
cooperationinthedecision-makingprocess,
theyendupinamuchworsecondition.
Source:https://corporatefinanceinstitute.com/resources/knowledge/other/prisoners-dilemma/
THEPRISONER’SDILEMMA

4. Source:https://corporatefinanceinstitute.com/resources/knowledge/other/prisoners-dilemma/
THEPRISONER’SDILEMMA
WhatisaPrisoner’sDilemma?
oIntheprisoner’sdilemmatheory,itisthe
responsibilityofthetwopartiestochoose
whethertocollaborateornot.
oEitherpartyisgiventhechanceto
defect,despitetheoptionoftheother
party.
oTheoutcomesoftheprisoner’sdilemma
areeitherbeneficialorinjuriousto
society.
oMakingbettereconomicchoicesrequire
cooperationbetweenindividuals.
o(ingametheory)asituationinwhichtwoplayerseachhavetwo
optionswhoseoutcomedependscruciallyonthesimultaneous
choicemadebytheother,oftenformulatedintermsoftwo
prisonersseparatelydecidingwhethertoconfesstoacrime.

5. Prisoner’sDilemmaScenario
oImaginethatthepolicearrestedtwo
suspectsofacrime.
oBothsuspectsareheldindifferentcellsand
theycannotcommunicatewitheachother.
oThepoliceofficeroffersbothsuspectsthe
opportunitytoeitherremainsilentorblame
anothersuspect.
oIfbothsuspectsremainsilent,theybothwill
serveonlyoneyearinprison.Iftheyboth
blameeachother,theybothwillservethree
yearsinprison.
Ifoneofthesuspectsblamesanotherandthe
otherremainssilent,thesuspectwhoremained
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THEPRISONER’SDILEMMA

6. Prisoner’sDilemmaScenario
Thetablebelowshowsthepossiblepayoffs:
Source:https://corporatefinanceinstitute.com/resources/knowledge/other/prisoners-dilemma/
THEPRISONER’SDILEMMA

7. Prisoner’sDilemma Explained
oInsuchasetting,bothsuspectsdonotknowthedecisionchosenby
anothersuspect.
oTherefore,themostrationaldecisionfromtheperspectiveofself-interestis
toblametheothersuspect.
oForexample,suspectAisafraidofremainingsilentbecauseinsucha
case,hecanreceivefiveyearsinprisonifsuspectBblameshim.
oIfsuspectAchoosestoblamesuspectB,hecanbesetfreeifsuspectB
remainssilent.
oHowever,thatisnotlikely,becausesuspectBisusingthesamerationale
andheisalsogoingtoblamesuspectA.
Althoughthedecisionofremainingsilentbybothsuspectsprovidesthemore
optimalpayoff,itisnotarationaloptionbecausebothpartiesbehaveintheir
self-interest.Ontheotherhand,thedecisionofblaminganothersuspectisa
rationaldecisionfromthatperspectiveanditprovidesNashequilibrium
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THEPRISONER’SDILEMMA

8. AvoidingPrisoner’sDilemma
oIndividualscan usedifferentformal
approachestomodifytheincentivesthat
decision-makersencounter.
oStrategieslikecombinedeffortforenforcing
laws,
and
precisepunitiveactionfordefectionsmight
helpinchanging numerous prisoner’s
dilemmasintobeneficialoutcomes.
oAbeneficialoutcomecanhappenbecause
cooperationproducesbetterresultsthan
defection.However,itmaynotbearational
outcomesincethedecisiontocooperate
fromanindividualstandpointisirrational.
THEPRISONER’SDILEMMA
Source:https://corporatefinanceinstitute.com/resources/knowledge/other/prisoners-dilem

9. AvoidingPrisoner’sDilemma…..CONTINUED
oHowever,somepartiestakeadvantageof
bothbehavioralandpsychologicalpartiality
overtime,suchaslong-terminteractions
influencedbyrepeatedengagements,high
levelsoftrustbetweenindividuals,andsimilar
cooperativebehaviorseithertowardsnegative
reciprocityofdefectionorpositivereciprocity
ofcooperation.
oTheideologiesabovemayadvanceovertime
withinagroupofcompetingparticipants.
Generally,theyirrationallyinfluenceindividuals
toselectoutcomesthatprovidemaximum
benefitstosocietycollectively.
THEPRISONER’SDILEMMA
Source:https://corporatefinanceinstitute.com/resources/knowledge/other/prisoners-dilem

10. dilemma
representsascenariowhere
decision-makersapplyastimulus
thatcreatesalessthanoptimal
outcome.
•Individualscanchooseamong
differentways todefeat
prisoner’sdilemmasandoptfor
superiorcombined results
despiteadverseincentives.
•Theoptimumrewardforeach
individualoccurswhenboth
partiesagreetoworktogether.
THEPRISONER’SDILEMMA
Source:https://corporatefinanceinstitute.com/resources/knowledge/other/prisoners-dilemma/

11. Thankyou!!!
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