(Published in Businessworld under The View from taft column, August 4, 2005)
The prisoners' dilemma is a peculiar yet perhaps the most renowned game of strategy in social science. Derived from game theory, it helps us understand what influences the balance between cooperation and competition among two or more individuals or entities in business, in economics, even in politics and other social settings.
Professors Dixit and Nalebuff, who have extensively studied game theory as applied in business, succinctly recount this simple yet powerful parable about two prisoners:
“The police have arrested two suspects and are interrogating them in separate rooms. Each can either confess, thereby implicating the other, or keep silent. No matter what the other suspect does, each can improve his own position by confessing. If the other confesses, then one had better do the same to avoid the especially harsh sentence that awaits a recalcitrant holdout. If the other keeps silent, then one can obtain the favorable treatment accorded a state's witness by confessing. Thus, confession is the dominant strategy for each. But when both confess, the outcome is worse for both than when both keep silent.”
Applications of the prisoner’s dilemma abound in business. For instance, consider two mobile operators providing similar services, each having its own pricing strategy. They capitalize on their combined market strength by charging a high price for the services, with each profiting P10 million a month. If one decides to charge a competitively low price, it gains a lot of subscribers away from the competitor. Its profit rises, say P14 million, and that of the competitor comes down to P7 million. When both operators set low prices, the profit of each is P8 million. In this case, the low-price strategy may be likened to the prisoner’s confession, and the high-price to keeping silent. Game theorists call the former cheating or defection, and the latter cooperation. Hence, cheating or defection is each firm’s dominant strategy, even though both firms are better off with cooperating.
The logic of the prisoner’s dilemma likewise provides a simple yet powerful modeling of political parties’ behavior. In particular, our country has recently witnessed a polarization of the diverse political landscape into two major blocs – the opposition and administration parties. As in the previous business application, the dominant strategy among the two blocs is cheating or defection. This is manifested by the successive rallies launched by the United Opposition (UNO) and the grand rally mounted by the administration. Moreover, the opposition and administration parties clearly have stood by their positions to support or oppose, respectively, the filing of an impeachment complaint against the president; and all these notwithstanding the benefit to the economy and the entire nation if both political blocs “cooperate” instead and agree on a singular political stand.
So why is cheating or defection the dominant strategy in the prisoner’s dilemma? There is obviously a clear incentive for a player to cheat or defect – a prisoner can obtain the favorable treatment accorded a state's witness by confessing, if the other keeps silent. In the mobile operators’ example, there is an incentive to gain more subscribers and consequently more profit if one charges a competitively low price. Likewise, a political party has the incentive of gaining, if not strengthening, political base and position, if the other “keeps silent”.
But perhaps many will argue that cheating or defecting only advances one’s private interests instead of furthering the collective interest of the group. On the contrary, it is often observed that cooperation between groups does not promote the interest of society as a whole. If the prisoners in the game cooperate, the police and ultimately the citizenry which it serves will have difficulty in pinning down the offender and obtaining conviction. Collusion among businesses to keep prices high is patently against the interest of consumers and society as a whole.
Similarly, collusion among political parties, either through “cooperation” or “remaining silent” only betrays the very reason why the electorate elected them to office – to represent the public’s interest. If parties ignore the issues that currently hound the government, then the public’s outcry for the “truth” will not be brought to light. Conversely, the absence of genuine competition among parties will only allow them to elude oversight by the electorate, giving them leeway to advance their own political interests.
If there is a strong incentive to cheat or defect in the prisoner’s dilemma, how can the players resolve such dilemma and sustain cooperation? The answer lies in the iterations of the game. In the mobile operators’ example, a month’s cheating allows one operator to gain P4 million, but mutual cheating results to P2 million losses for each. If an operator retaliates against a “cheater” heavily by further bringing down the price, then this results to even more losses for the other, thereby “punishing” previous non-cooperative play. So operators, in the iterations of the game, will need to find a sustained pricing equilibrium to avoid losses.
Likewise, political parties need to realize that constant rallies will only result to even further aggravations in the economy that will affect the entire nation. An equilibrium may be reached by following the constitutional process.
In sum, the prisoner’s dilemma allows us to understand the dynamics of cooperation and competition that can either ameliorate or aggravate the standing of the players and society as a whole.
--------------
Reynaldo Lugtu, Jr. is a lecturer in Management Principles in the MBA Program of De La Salle Professional Schools. He is an executive at an IT services firm. He may be e-mailed at rlugtu2002@yahoo.com.
The prisoners' dilemma is a peculiar yet perhaps the most renowned game of strategy in social science. Derived from game theory, it helps us understand what influences the balance between cooperation and competition among two or more individuals or entities in business, in economics, even in politics and other social settings.
Professors Dixit and Nalebuff, who have extensively studied game theory as applied in business, succinctly recount this simple yet powerful parable about two prisoners:
“The police have arrested two suspects and are interrogating them in separate rooms. Each can either confess, thereby implicating the other, or keep silent. No matter what the other suspect does, each can improve his own position by confessing. If the other confesses, then one had better do the same to avoid the especially harsh sentence that awaits a recalcitrant holdout. If the other keeps silent, then one can obtain the favorable treatment accorded a state's witness by confessing. Thus, confession is the dominant strategy for each. But when both confess, the outcome is worse for both than when both keep silent.”
Applications of the prisoner’s dilemma abound in business. For instance, consider two mobile operators providing similar services, each having its own pricing strategy. They capitalize on their combined market strength by charging a high price for the services, with each profiting P10 million a month. If one decides to charge a competitively low price, it gains a lot of subscribers away from the competitor. Its profit rises, say P14 million, and that of the competitor comes down to P7 million. When both operators set low prices, the profit of each is P8 million. In this case, the low-price strategy may be likened to the prisoner’s confession, and the high-price to keeping silent. Game theorists call the former cheating or defection, and the latter cooperation. Hence, cheating or defection is each firm’s dominant strategy, even though both firms are better off with cooperating.
The logic of the prisoner’s dilemma likewise provides a simple yet powerful modeling of political parties’ behavior. In particular, our country has recently witnessed a polarization of the diverse political landscape into two major blocs – the opposition and administration parties. As in the previous business application, the dominant strategy among the two blocs is cheating or defection. This is manifested by the successive rallies launched by the United Opposition (UNO) and the grand rally mounted by the administration. Moreover, the opposition and administration parties clearly have stood by their positions to support or oppose, respectively, the filing of an impeachment complaint against the president; and all these notwithstanding the benefit to the economy and the entire nation if both political blocs “cooperate” instead and agree on a singular political stand.
So why is cheating or defection the dominant strategy in the prisoner’s dilemma? There is obviously a clear incentive for a player to cheat or defect – a prisoner can obtain the favorable treatment accorded a state's witness by confessing, if the other keeps silent. In the mobile operators’ example, there is an incentive to gain more subscribers and consequently more profit if one charges a competitively low price. Likewise, a political party has the incentive of gaining, if not strengthening, political base and position, if the other “keeps silent”.
But perhaps many will argue that cheating or defecting only advances one’s private interests instead of furthering the collective interest of the group. On the contrary, it is often observed that cooperation between groups does not promote the interest of society as a whole. If the prisoners in the game cooperate, the police and ultimately the citizenry which it serves will have difficulty in pinning down the offender and obtaining conviction. Collusion among businesses to keep prices high is patently against the interest of consumers and society as a whole.
Similarly, collusion among political parties, either through “cooperation” or “remaining silent” only betrays the very reason why the electorate elected them to office – to represent the public’s interest. If parties ignore the issues that currently hound the government, then the public’s outcry for the “truth” will not be brought to light. Conversely, the absence of genuine competition among parties will only allow them to elude oversight by the electorate, giving them leeway to advance their own political interests.
If there is a strong incentive to cheat or defect in the prisoner’s dilemma, how can the players resolve such dilemma and sustain cooperation? The answer lies in the iterations of the game. In the mobile operators’ example, a month’s cheating allows one operator to gain P4 million, but mutual cheating results to P2 million losses for each. If an operator retaliates against a “cheater” heavily by further bringing down the price, then this results to even more losses for the other, thereby “punishing” previous non-cooperative play. So operators, in the iterations of the game, will need to find a sustained pricing equilibrium to avoid losses.
Likewise, political parties need to realize that constant rallies will only result to even further aggravations in the economy that will affect the entire nation. An equilibrium may be reached by following the constitutional process.
In sum, the prisoner’s dilemma allows us to understand the dynamics of cooperation and competition that can either ameliorate or aggravate the standing of the players and society as a whole.
--------------
Reynaldo Lugtu, Jr. is a lecturer in Management Principles in the MBA Program of De La Salle Professional Schools. He is an executive at an IT services firm. He may be e-mailed at rlugtu2002@yahoo.com.
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