The Prisoner’s Dilemma is a mathematical game theory that refers to a game in which the payoff from playing the dominant strategy is not the highest payoff possible and illustrates how self-interest can lead rational individuals and companies to pursue a course leading to mutual self-destruction, even when that destruction is foreseeable or in the case of companies certain decisions could have financial impact for better or worse. It seems that the Prisoner’s Dilemma impacts the many small decisions we consider making. The dilemma provides the logical framework for many situations we face every day in real life. Whether we’re competitors conducting business, spouses negotiating understandings our choices are reflected by the prisoner dilemma’s model. The two parties involved will often be better off as a pair if each resists the temptation to go it alone and instead cooperates with or remains loyal to the other person. Both parties’ pursuing their own interests exclusively leads to a worse outcome than does cooperation.
A situation in which competing firms must make their individual decisions without knowing the decisions of their rivals and arises when all rivals possess dominant strategies, and when both rivals use their dominant strategies, they are worse off than if they had cooperated in making their decisions. The following is the famous scenario (then I’ll share some examples) known as the Prisoner’s Dilemma: Two suspects: Vinny & Tony are arrested by the police. The police have insufficient evidence for a conviction, and, having separated the prisoners, visit each of them to offer the same deal.
If one testifies for the prosecution against the other (defects) and the other remains silent (cooperates), the defector goes free and the silent accomplice receives the full 10-year sentence. If both remain silent, both prisoners are sentenced to only six months in jail for a minor charge. If each betrays the other, each receives a five-year sentence. Each prisoner must choose to betray the other or to remain silent. Each one is assured that the other would not know about the betrayal before the end of the investigation. Payoff MatrixTony-Cooperate (Don’t Confess)Tony-Defect (Confess) Vinny-Cooperate (Don’t Confess)V&T both get 6 monthsV get 10 years T goes free Vinny-Defect (Confess)V gets 10 years
T go freeV & T both get 5 years
An example in business is about something we have been talking about all through this course: a pizzeria. They both decide to lower their prices. The low price strategy is a dominant strategy for both pizzerias. Both choose to charge low prices, even though the high price/high price alternative is more attractive. This is because it is an unstable equilibrium. One pizzeria could always choose to charge a lower price, to maximize its profits. So they both settle for charging a lower price. The payoff matrix for how many more pizza’s each pizzeria makes a month may look like this: Payoff MatrixSorrento Pizzeria-High PriceSorrento Pizzeria-Low Price Sulmona Pizzeria-High Price400, 400100, 600 Sulmona Pizzeria-Low Price600, 100200, 200
A second example is let’s say that Raquel’s Scented Candles and Rania’s Scented Candles are the producers of candles. Rania’s Candles decides to advertise to differentiate its candles as being Artisan, differnt from Raquel’s candles. If Rania decides to advertise, the payoff in dollar amount profit (or loss) might look like this: Payoff MatrixRania’s Candles-AdvertiseRania’s Candles-Don’t Advertise Raquel’s Candles-Advertise$50, 000, $50, 000$-25, 000, $75, 000 Raquel’s Candles-Don’t Advertise$75, 000, -$25, 000$10, 000, $10, 000
A third example in recent news is the use of performance-enhancing drugs in professional sports specifically the story of Lance Armstrong. Here the athletes are the players, and the two possible strategies are to use performance-enhancing drugs or not. If you use drugs while your opponent doesn’t, you’ll get an advantage in the competition, but you’ll suffer long-term harm (and may get caught). If we consider a sport where it is difficult to detect the use of such drugs, and we assume athletes in such a sport view the downside as a smaller factor than the benefits in competition. The best outcome (with a payoff of 4 let’s say) is to use drugs when your opponent doesn’t, since then you maximize your chances of winning. However, the payoff to both using drugs (2) is worse than the payoff to both not using drugs (3 let’s say), since in both cases you’re evenly matched, but in the former case you’re also causing harm to yourself. The payoff for how many titles won may look like this: Payoff MatrixOpponent-Don’t Use DrugsOpponent-Use Drugs
Lance-Don’t Use Drugs3, 31, 4
Lance-1-Use Drugs4, 12, 2
A fourth example in world news politics has to do with a story from the summer of 2010 related to the country where my husband was born, Lebanon. A real Prisoner’s dilemma when all of a sudden, Hezbollah Secretary-General Sayyed Hassan Nasrallah is in the hot seat. After years of investigating, deliberating and contemplating, the Special Tribunal for Lebanon, established by the UN to prosecute the assassination of Rafic Hariri in 2005, is about to indict Hezbollah members, as “ rogue” as they may be, on charges of being behind the murder of the Lebanese. Our family was waiting for the Tribunal’s decision and wondered how Hassan Nasrallah was going to act? If Hezbollah had a hand in Hariri’s killing, the Syrians had a hand in it too (after all, Hezbollah is “ Syria backed” as the Western press likes to say and they got their weapons through Syrian channels).
Should Nasrallah accuse Syria, his friend, tell it all and get the reduced sentence? Or should he take the full blame and remain silent about Syrian involvement? But what would be his reward for that? Well it turned out that Hezbollah is accusing Isreal of Harir’s death and the Tribunal accused two of Hezbollah’s members. The Tribunal asked Hezbollah to turn those accused men over however Hezbollah has not done so “ yet”. In the “ real” prisoner’s dilemma, the only possible equilibrium for the game is for all players to defect, meaning to betray their fellow prisoner. Syrian president Assad may have already done that. Will Nasrallah follow? This is the question. We’ll wait and see but the payoff matrix might look like this: Payoff MatrixAssad-Cooperate (Don’t Confess)Assad-Defect (Confess) Nasrallah-Cooperate (Don’t Confess)N&A both get 3 yearsN get 30 years A goes free
Nasrallah-Defect (Confess)N gets 30 years
A go freeN&A both get 12 years
The Beach Kiosk Theory is another idea looking at stable and unstable equilibriums. The idea is having two competitors within close vicinity of one another to capture more market share than the competition. The noted scenario is at a beach that is 200 meters long. There are two people licensed to sell soft drinks, snacks, etc. They can set up their kiosks anywhere they want on the beach. People will go to whichever kiosk is closer. One choice is for one located 50 yards from the end of the beach, and the other 50 yards from the other end. This way, they each get half of the business from the beach. One vendor decides to move in closer to get more customers. The other does the same until they are next to each other which would give them each a stable equilibrium. Only when they are both there, will neither one want to change their position. Both the original equilibrium and final one will split the traffic received 50/50. This is another example that shows how one firm’s decisions are going to affect other firm’s decisions.
They will finally both opt for a choice where they are in a stable equilibrium. Now that maybe a bit harder for brick and mortar type businesses to up sand move closer to their competition. The average consumer doesn’t know what they want. They know they want to buy some tools, they know they need to get a prescription filled; they know they want to buy a car. They just don’t know what to buy or where to buy it. Imagine that you’re in the market for a car. You want a Honda Accord, Toyota Camry, Nissan Altima, or a Ford Fusion but you aren’t sure what you want to buy. You want to buy a car today but the dealerships are spread across town and you only have time to drive to one location. At one individual dealership, your odds of finding the right car are 1/4. This means your odds of not finding the right car are 3/4. This means there is a 75% chance that no one will get a sale. Now imagine two of the dealerships were located together and you have time to visit both since they’re so close. Now there is a 50% chance that someone will get a sale.
This follows the logic of the Beach Kiosk theory and if all 4 dealerships are located together there is a 100% chance that someone will get a sale, meaning each dealership has a 25% chance of landing the sale when they are located together. If the Nissan (or any other) dealership were alone, then it would only have a 25% chance of being selected, and then a 25% chance of being the right car for the customer. These probabilities are multiplied and therefore each dealership, located separately, only has a 6. 25% chance of landing a sale from you, the shopper with the time to only go to one part of time.
An example of Beach Kiosk is having at least one competitor nearby such as two supermarkets, two gas stations gas stations, two banks, two pizzeria’s, two department stores, cleaners, mechanics, furniture stores, home improvement stores, liquor stores, fast food chains, drug stores, car dealers, and about ten nail salons smack dab next too or near one another. Even churches of different denominations want a stake near another church. However let me get into the environment of some of these players and how they may be able to be more profitable. You have a highly populated area in the suburbs of the city of Boston (where I am from by the way) that has at least two and up to four or five competing supermarkets all within the same area of two to three miles or closer it seems: Stop & Shop, Market Basket, Trader Joes, Whole Foods, Shaws, Johnnie’s Food Market. How do they survive and make a profit with the labor costs, food costs, rent/lease payments, utilities, etc.? I noticed they try to differentiate somewhat in some food selection offerings or the culture of the store.
For example, Trader Joe’s and Whole Foods focus on selling more organic, all natural foods whereas the others focus on product selection and competing costs. Consumers, like myself, are cutting out luxuries, and focusing on purchasing necessities instead. No news flash here! However, since housing, health and food costs constitute consumers’ largest cash outlays, customers are getting ever more frugal. Even with necessities, in my opinion, especially if you are out of work. Since most supermarkets stock pretty much the same merchandise, have cut prices to the bone without much room for further cuts, with few “ wow factor” new product offerings on the horizon, what next? Food retailers need to seek out new trends and technology that might differentiate them from competitors. Others that could bring in more profits while having a competitor next door and one in particular that I’ve heard about but have not seen “ yet” are the “ smart shopping assistance where consumers can breeze through stores with smart shopping carts that tabulate the products as they are added, and download available coupons for the products in the carts on their cell phones.
They can then allow payment for the groceries without the consumers ever having to queue up in a cashier line. I can think of a convenience factor to compete even against the “ Quick Check” type stores and smaller convenience stores. Large supermarket chains could open up smaller stores in specific locations, stocking them with basic needs and ready-to-eat meals. They may have a lower average sale but consumers will shop with more frequency. Supermarkets could offer extra services like in-store baby-sitting which would make it quick and easy for consumers to shop. What about catering to minority purchasing power in areas where ethnic minorities live, smaller locations are catering their product mix and meal offerings to meet their needs. Also targeted in-store advertising. Wal-Mart’s Smart Network features a technologically advanced in-store television that provides detailed product information and advertising on individual screens. Develop niche private label products, such as new organic brands, offer in-store amenities like healthier restaurants or more eco-friendly store environments. Implementing these ideas can lead to highly differentiated stores for consumers.
Of course, when one supermarket chain implements any of these ideas successfully, can it be long before their competitors jump on the bandwagon? Then what? The Beach Kiosk scenario closes in again! If I were the owner of one of these markets I would before to get some key questions answered to ensure the ideas are feasible and go with what the environment and the people support. As for nail salons even if there two to ten in a small area they could ensure consistency. I’ve yet to visit a nail salon that have nail technicians all perform at the same level of technical or professional competence. This is an area of improvement, I feel, that the entire industry could work on and whoever “ gets it” will continue to grow their business in their area and maybe even expand or even franchise because they could make a name for themselves and be known for their technical and professional competencies. For me it comes down to a vendor offering the product I need, at a fair price, with friendly approachable, consistent service with a smile.
That’s what makes me keep coming back! I wanted to mention Link TV because news stations were mentioned in class last week and I believe Link TV is unique and has really taken advantage of gaining market share from other media including news stations such as BBC, CNN Fox-of course, and most of all PBS which I feel maybe it’s closest competitor. Link TV is a non-commercial American satellite television network providing “ diverse perspectives on world and national issues.” It is carried nationally on DirecTV and Dish Network. Link TV was launched as a daily, 24-hour non-commercial network in 1999. It receives no money from the satellite providers, but relies instead on contributions from viewers and foundations. It broadcasts a mix of documentaries, global and national news, music of diverse cultures, and programs promoting citizen action. The network also airs English language news from Deutsche Welle and Al Jazeera English as well as various documentaries and world music videos. The network also produces Mosaic: World News from the Middle East, a program of translated news reports from the Middle East.
Keat, P. G. & Young, P. K. Y. (2009). Managerial economics: A brief review of important economic terms and concepts, P11, Pearson Education, Inc., Upper Saddle River, New Jersey, 07458.