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Reflection – M. Serkan Pektas

by on November 30, 2007

Prisoner’s Dilemma
The Prisoner’s Dilemma was originally framed by Merrill Flood and Melvin Dresher working at RAND in 1950. Albert W. Tucker formalized the game with prison sentence payoffs and gave it the “Prisoner’s Dilemma” name (Poundstone, 1992).[1]

The prisoner’s dilemma was used to interrogate people in former Soviet Union to reveal the secret groups working against the government. It was simply testing the trust between two people to get the truth. It has some points, but mostly the prisoners accuse each other to get free, even if they both are innocent.

The dilemma simply works like that. Each prisoner interrogated in different rooms. However, both know that:
– If they do not speak they are sentenced for one year,
– If both speak, they are sentenced for three years,
– If one of them speaks, the prisoner who speaks goes free and other one is sentenced for 5 years.

According to this setting, at least one of them is going to admit and the crime is revealed. There are three possibilities in this situation:
– Both of them are guilty (http://www.youtube.com/watch?v=0U-3RzjNLXQ)
– One of them is guilty
– Both of them are innocent.

The first assumption for this situation is that both of them are guilty, the best situation for them is not to speak, but there are some other thoughts when they know the above mentioned possibilities:
– Both of them think that the other one would speak to them, so the best case for him/her to speak, too.
– One of the prisoners thinks that the other one is not going to speak, and instead of spending one year in jail, the best case for the prisoner is simply to speak what they did and he/she goes free.

The assumption of the interrogators is that each prisoner wants to minimize his/her sentence and the best case for them is not to speak. However, the best case for an individual is to assume that the other prisoner is not going to speak but he/she is. Hence, both get sentenced.
In the second possibility, the innocent prisoner thinks that the best possible case for him/her is to admit what he/she has been accused for, and hopes that the other one is not. The guilty prisoner knew already the best alternative for the other prisoner is speaking, so he also speaks for minimizing his sentence.

In the third possibility, they both think that the best possible case for him/her is to admit what he/she has been accused for, and hopes that the other one is not.

However, the secret groups had improved counter argument for this situation. To avoid the possibility of thinking that “speak and go free”, they started to punish their members who spoke and went free. This strategy was strengthened the collaboration between prisoners, and they did not speak.

In game theory, the prisoner’s dilemma this is a type of non-zero-sum game. The similar thoughts can be applied to the business world. The equally balanced companies that are targeting the same customers should relay each other, when they are planning to increase the prices of their products or services correspondingly. Their dilemma is whether maximizing total profit of all companies or to maximize single company’s profit. This usually occurs in an oligopolistic industry, where there are a small number of sellers and usually involve homogeneous products. It is a formal agreement among firms and called as cartel. Cartel members may agree on such matters as price fixing, total industry output, market shares, allocation of customers, allocation of territories, bid rigging, establishment of common sales agencies, and the division of profits or combination of these.[2] The aim of such collusion is to increase individual member’s profits by reducing competition.

[1] Prisoner’s dilemma. (2007, November 24). In Wikipedia, The Free Encyclopedia. Retrieved 19:48, November 30, 2007, from http://en.wikipedia.org/w/index.php?title=Prisoner%27s_dilemma&oldid=173469681
[2] Cartel. (2007, November 27). In Wikipedia, The Free Encyclopedia. Retrieved 20:15, November 30, 2007, from http://en.wikipedia.org/w/index.php?title=Cartel&oldid=174189656

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