What is the Prisoner’s Dilemma? How is this dilemma similar to the one for two firms competing for market share as described in the text?
What will be an ideal response?
Assume there are two people who have committed a crime together and get arrested. The police put each criminal in a separate cell and interrogate each one. A confession from a criminal will result a lighter sentence for that criminal. If, however, each criminal does not confess then each criminal will be set free. The dilemma for each criminal is whether to confess or not. If one criminal confesses, but the other criminal does not, then the criminal that confesses will get a lighter sentence than the criminal that does not confess. So each criminal has to make a decision about whether to confess based on what each one thinks the other one will do. If a criminal is fearful that the other criminal will confess, then the best strategy would be for that criminal to also confess. As a result, both criminals confess.
The Prisoner’s Dilemma is similar to two firms who must compete for market share using a high-price strategy or low-price strategy. If both firms choose a high-price strategy, each firm can make more profit than if both firms adopt a low-price strategy. But there is uncertainty about what the other firm will do that creates a dilemma. If one firm chooses a low-price strategy and the other firm chooses a high-price strategy, then the firm choosing the high-price strategy will be less profitable. So both firms are fearful of adopting the high-price strategy and having the other firm adopt a low-price strategy. As a consequence, each firm decides to adopt the low-price strategy. This “low-price and low-price” outcome for the two firms is similar to the “confess and confess” outcome for the two criminals.
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Refer to Scenario 12.1. What is the probability of either Simon, Paula, or both of them trying to rescue the man?
A) 9% B) 49% C) 70% D) 91%
Economic theory provides insights into the range of possibilities for cost relationships. Studies such as those by Blinder et al. provide insights into where, within that range, many firms operate
Thus, there is no real conflict between theory and reality, as some people might try to claim. Indicate whether the statement is true or false
If average variable cost exceeds average fixed cost at a particular level of output: a. Profits must be positive
b. That fact is meaningless for deciding the quantity of output to produce. c. It is more likely that the output level is low relative to the designed capacity of the production facility than that the output level is low relative to the designed capacity of the production facility. d. Both b and c. are likely true.
If a nation's currency depreciates, this will tend to
a. shift a nation's balance of trade toward a deficit. b. cause a deficit in the government's budget (expenditures - revenues). c. make foreign goods more expensive for the nation's citizens. d. make foreign goods cheaper for the nation's citizens.