Question

How can game theory help us understand problems of collaboration? Explain "free-riding temptation” by using the Prisoner's Dilemma (a typical Prisoner's Dilemma game is given below)

Answer 1

Here in this payoff matrix, the Defect is the dominant strategy for the both firms : A and B.

The payoffs from the defects: ( 4,1) > the payoffs from the Cooperation : (3,1).

Thus both firms would go with their dominant strategies and Nash equilibrium will be the (D:D)

But such nash equilbrium does not optimize the outcomes. the both firms can increase their profits by cooperating and not following the dominant strategies.

The outcomes would be the ( 3,3)

But after entring into the cooperation, there is strong incentive to get involved in the cheating process. here each firm seeks to become freerider by deviating from the cooperative strageis believing that other firm would continue to stick to the cooperative stragies. Both thinks on the similar line and eventually ends up having the less optimal outcome.