The Prisoners' Dilemma in the Airline Industry

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  • Topic: Game theory, Pareto efficiency, Nash equilibrium
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The Prisoners’ Dilemma in the airplane industry

Games of Strategy Home Assignment

Tamás Seres

Introduction3
The Prisoners’ Dilemma3
An Oligopolistic market:5
The Case Study6
Conclusion8
References:8

Introduction

In today’s world the Prisoners’ Dilemma is a common phenomenon in business, politics and in social life as well. This paper will analyze a real life example. It will describe the airplane manufacturing industry and their two giant manufacturers: Airbus and Boeing. The two companies find themselves in a business environment where both parties take the others decision into consideration and act in respect of those. The companies can have two choices: to cooperate with each other for higher prices or to compete at lower price to win more customers. The case study is played in a special business environment where only two companies are operating on the market. The action of one company has major effect on its competitor. Therefore it is essential for the players to analyze the decision of their competitor.

Firstly I would like to present the Prisoners’ Dilemma in detail. Afterwards I will write a review on the economical terms of an oligopolistic market. Then the detailed analysis of the situation will be presented. Finally a conclusion will be given.

The Prisoners’ Dilemma

According to an internet article (Investopedia.com) a simple definition of the Prisoners’ Dilemma is the following: „A paradox in decision analysis in which two individuals acting in their own best interest pursue a course of action that does not result in the ideal outcome. The typical prisoner’s dilemma is set up in such a way that both parties choose to protect themselves at the expense of the other participant. As a result of following a purely logical thought process to help oneself, both participants find themselves in a worse state than if they had cooperated with each other in the decision-making process.”

The well known example shows the situation perfectly:
Two bank robbers, John and Bob got arrested by the police. They are interrogated in different rooms and neither of them have any information what the other says. The interrogator offers the same deal for both of them. If John confesses about the robbery but Bob didn’t then Bob gets arrested for 10 years but John is free. If Bob confesses, but John didn’t then John will be sentenced for 10 years to prison and Bob is free. If none of them confesses they receive a punishment for 6 month in prison. If both of them confesses then John and Bob gets 5-5 years. The prisoners’ aim is to minimize their own punishment and therefore they must act rational. According to the textbook (Dixit, Skeath. 2004) rational behavior assumes that players are perfect calculators and flawless followers of their strategy. By acting rational their aim is to achieve the highest payoff for themselves (in this case the lowest prison sentence or no punishment at all).

Each suspect has two choices: Either to confess (defect) or to stay silent (cooperate):

|  |Bob Confesses |Bob does not Confess | |John Confesses |John: 5 year |John: Free | | |Bob: 5 year |Bob: 10 years | |John does not Confess |John: 10 year |John: 6 months | | |Bob: Free |Bob: 6 months |

The Prisoners’ Dilemma is a simultaneous-move game which means people make their choices at the same time not one after the other (e.g. in chess). Moreover they are uncertain of each others’ behavior or in other terms they don’t know what the other will...
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