Prisoners Dilemma in the Business World

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You and another individual have committed a crime and have been apprehended. Both of you have been placed in separate rooms for interrogation with no means of communication with each other. You were told that if you confess and testify against him/her, who does not confess, the charges against you will be dropped and you will go free and the other will be sentenced for 3 years in prison. But if the two of you confess, both of you will be sentenced to 2 years in prison. However, if none of you confesses, the both of will be sentenced to only 1 year in prison. You were also told that the other individual has been offered the same conditions. What would you do?

let’s break down the thinking process:

  • If you think that the other individual is going to testify against you, then you’ll opt to confess as well because you’ll get a lesser sentence.
  • If you think that the other individual is not going to testify against you, you’ll also opt to confess because your charges will be dropped completely, and he/she goes to prison.

Typically, as rational agents, both of you will be tempted to confess, and this collectively results in a worse outcome when in reality choosing not to confess is the best outcome.

Let’s explain it in the context of marketing. Imagine that there are two bottled water companies (company A and company B). Both want to increase their market share through advertising.

Assuming both companies are of equal strength, if both companies do not advertise, their market share will be equal (50% each). But, if company A decides to advertise, and company B does not, then company A will get a bigger market share. However, if they both decide to advertise, then both will be worse off because they still ended up with 50% market share each and having to spend on advertising.

Sometimes, the best option may not be as advantageous as they appear to be!

 

To read more on how the Prisoners Dilemma affects the business world clink HERE.


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