Question

Q.2) Discuss the Prisoner’s Dilemma game. What is the importance of this game in economics?

Answer 1

Prisoners dilemma is one of the most important concepts in game theory. It is a paradox. In prisoners dilemma, two individuals acts in their own self interest that is they both try to make decisions by protecting themselves at the expense of the other player.

It was given by Albert W Tucker and is a non cooperative game as both the players will not cooperate with each other because the risk of the other person deflecting is high.

We take the example of a policeman and 2 prisoners who are held for a crime.

The policeman investigates and puts a situation in front of the two prisoners.

If they confess the crime, they will be jailed for 5 years each. On the other hand, if both deny they will be free to go.

If one confesses and the other deny, the one who denies will be jailed for 10 years while the one who confesses will be jailed for 5 years.

The prisoners do not know what the other is going to choose and will always try to maximize their own benefit. If they both cooperate they both can deny and be set free. But since they don't know about each other and if one of them confesses the other will have to go to jail for 10 years. So keeping in mind their own benefit the best strategy for both the prisoners will be to confess the crime.

If prisoner 1 confesses whereas prisoner 2 denies, 2 will be jailed for 10 years whereas prisoner 1 will be jailed for 5 years.

On the other hand, if prisoner 1 denies and prisoner 2 confesses, prisoner 1 will be jailed for 10 years and prisoner 2 for 5 years.

If both of them confess the time will be 5 years each. Since this is a non cooperative game, both the prisoners will confess the crime in order to protect themselves and will go to jail for 5 years.

Prisoners dilemma is an important concept in economics as it helps in understanding how to strike a balance between cooperation and competition. It is highly useful for strategic decision making. It is widely used in an oligopoly market where there are 2-10 sellers in the market. It helps in making strategies best for the seller and they can meet their own targets with this.