The prisoner's dilemma

	Prisoner Y
Prisoner X		Confess	Not confess
	Confess	X (5 years) Y (5 years)	X ( 3 months) Y (10 years)
	Not confess	X (10 years) Y (3 months)	X (1 year) Y (1 year)

What is the dilemma of the prisoner ? Confess or Not confess ?

Different strategies for X :

X confess :

• 3 months imprisonment if Y do not confesses
• 5 years imprisonment if Y confesses

X do not confess :

• 10 years imprisonment if Y confesses
• 1 year imprisonment if Y do no confesses

Y can analyze the same strategies.

If the prisoners have a non cooperative attitude, the best solution is to confess. They will do both 5 years imprisonment

If the prisoners can cooperate, the best solution is not to confess. In this case they will do both 1 year imprisonment.

Economic examples :

• Cooperative attitude : the cooperative oligopoly (cartel)
• Noncooperative attitude : noncooperative oligopoly

Economic theories issued from the game theory for noncooperative oligopoly :

• Nash Equilibrium
• Cournot equilibrium
• Stackelberg Equilibrium
• Bertrand Equilibrium

Sources :

Modern Industrial Organization, 2nd edition, Dennis .W. Carlton , Jeffrey .M. Peroloff, Addfison-Wesley, 1994

Economie Industrielle ( traduction de la 2ème édition par Fabrice Mazerolle), Dennis .W. Carlton , Jeffrey .M. Peroloff, de Boeck Université, 1998

Gaining and Soustaining Competitive Advantage, Jay. B. Barney, Addison-Wesley, 1997

Contemporary Strategic Analysis, Robert M. Grant, 3th edition, Blackwell, 1998

Strategic Management, Raphael Amit, Professor at Wharton University of Pennsylvania, US

Cours de Microéconomie, Bernard Jaquier, Ecole Hôtelière de Lausanne, 2003

 

Page publisher : Bernard Jaquier, Professor in Economics and Finance, Ecole Hôtelière de Lausanne, Switzerland, 2010