Question

Review Chapter 15, Table 15.4, Prisoner Dilemma. Suppose the game starts with both Jesse and Frank planning to “Stay Mum” in the lower right cell. Discuss how each player would evaluate the situation and decide whether to change decisions. If each player makes decisions to minimize the penalty, in which cell will this game end? Is there a Nash equilibrium? This is from book fifth edition managerial economics.

Answer 1

In the game of prisoner's dilemma, if both the players, Jesse and Frank stay quiet, they would get lowest punishment.

But from an individuals point of view for both, it isn't the least punishment. They would get least punishment if they would fink and the other would keep quiet. Thus, starting from planning to keep quiet, they would think that other surely has benefits of finking and this would increase their punishment and reduction in punishment of the finker. Thus, they both would change their position from keeping quiet to finking.(the intuition is that if other person keeps quiet, there would be reduction in punishment and even if other person also finks, the amount of punishment would be lower than that in case of them being quiet and other finking.)

Thus, when both think this way, finking would be their dominant strategy and their would be Nash equilibrium, (fink,fink) for both the players.