The Prisoner’s Dilemma

In our price-cutting game in Figure 11-5, we saw that competition among firms led to the competitive outcome with low prices. We also saw that, ~ an almost miraculous coincidence of economic life, A,dam Smith’s invisible hand produces in perfectly competitive markets an efficient allocation of resources. But the beneficial outcome of the invisible hand does not arise in all circumstances. This is illustrated in the prisoner’s dilemma, one of the most famous of all games. Figure 11-6 is like Figure 11~5 here it refers to prisoners Molly and Knuckles, who are partners in crime. The district attorney interviews each separately, saying, “I have enough on both of you to send you to jail for a year. But I’ll make a deal with you: If you alone confess, you’ll get off with a 3-month sentence, while your partner will serve 10 years. If .you both confess, you’ll both get 5 years.”

What should Molly do? Should she confess and hope to get a short sentence? Three months are preferable to the year she would get if she remains silent, Bilt wait, There is an even better reason for confessing. Suppose Molly doesn’t confess and, unbeknownst to her, Knuckles does confess. Molly stands to get 10 years! It’s clearly better in this situation for Molly to confess and get 5 years rather than 10 years., , Knuckles is in the same dilemma: if only he knew ‘what Molly was thinking, or what Molly thought Knuckles was thinking Molly was thinking, OT The significant result here is that when both prisoners act selfishly by confessing, they both end up with long prison terms. Only when they both act conclusively or altruistically will they end up with short prison terms.

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