The Basics
- Simple definition: A game where individual rationality leads to a worse outcome for all than if they had cooperated.
- Core idea: What’s best for each individual leads to a bad outcome for everyone collectively.
- Think of it as: The classic example of why cooperation breaks down even when it’s in everyone’s interest.
What It Actually Means
Two suspects are arrested separately. Each is offered: betray the other (testify) and go free if the other stays silent; if both betray, both get moderate sentences; if both are silent, both get light sentences. Each has a dominant strategy to betray, leading to both betraying, worse for both than if both stayed silent. The dilemma captures tension between individual and group interest. It explains arms races, price wars, environmental degradation, and why cartels are unstable.
Example
Two Pakistani firms in a cartel agree to keep prices high. Each can secretly cheat, cutting prices slightly, gaining market share. If both cheat, prices crash – worse than if both followed the agreement. But each fears the other will cheat, so both cheat – prisoner’s dilemma.
Why It Matters
The prisoner’s dilemma explains why cooperation is hard to sustain, why cartels collapse, and why institutions (contracts, laws, repeated interaction) are needed to overcome it.
See also
Game Theory • Nash Equilibrium • Dominant Strategy • Collusion • Cooperation
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