Game Theory presents the famous Prisioners' Dilemma, that is very easy
to understand. However, can you mention any situation where companies
are trapped in this dilemma and how they use the theory to make their
decision?

Hi,

I may be dating myself here, but I remember the days of gasoline price
wars.  If two gasoline station owners across the intersection from
each other agreed to cooperate, they could both earn a reasonable
amount of profit by keeping the price high.  If one station owner
would cut prices and the other didn't, the one cutting prices would
attract the customers and gain more than by cooperation (known as
price fixing in this context).  But if both decide to undercut the
other, eventually both would lose out.  Such a case is a classic
example of the prisoners' dilemma as applied to business.

Here is a similar theoretical example as applied to business:

Prisoners' Dilemma
"The prisoners' dilemma has applications to economics and business.
Consider two firms, say Coca-Cola and Pepsi, selling similar products.
Each must decide on a pricing strategy. They best exploit their joint
market power when both charge a high price; each makes a profit of $10
million per month. If one sets a competitive low price, it wins a lot
of customers away from the rival. Suppose its profit rises to $12
million, and that of the rival falls to $7 million. If both set low
prices, the profit of each is $9 million."
http://www.econlib.org/library/Enc/PrisonersDilemma.html

The above article also points out, in answering your question, that
the application of the game theory involves repeated "playing" of
game:

Prisoners' Dilemma
"Can 'prisoners' extricate themselves from the dilemma and sustain
cooperation when each has a powerful incentive to cheat? If so, how?
The most common path to cooperation arises from repetitions of the
game. In the Coke—Pepsi example, one month's cheating gets the cheater
an extra $2 million. But a switch from mutual cooperation to mutual
cheating loses $1 million. If one month's cheating is followed by two
months' retaliation, therefore, the result is a wash for the cheater.
Any stronger punishment of a cheater would be a clear deterrent."
http://www.econlib.org/library/Enc/PrisonersDilemma.html

Although price-setting is the most obvious example of this aspect of
game theory, there are others.  One I've seen first-hand is the
competition by local governments to entice businesses. Keeping a
business and keeping it from moving elsewhere is good for the local
economy, but the cost of doing so (such as cutting the company's
taxes) can also have negative drawbacks. Application of the theory in
this case is shown in the following document:

Local Economic Development as a Prisoners’ Dilemma:
http://faculty-staff.ou.edu/R/Cynthia.Rogers-1/papers/pdilemma.ppt
HTML format:
http://216.239.39.100/search?q=cache:Q-xGi7Ev93EC:faculty-staff.ou.edu/R/Cynthia.Rogers-1/papers/pdilemma.ppt+%22prisoners+dilemma%22+business+winning&hl=es&ie=UTF-8

Here are some other documents that give examples of how the "game"
applies to businesses. The first one focuses on applying the theory to
"get out" of the dilemma:

The Prisoners' Dilemma and Repeated Games
The document explains how the game theory is applied, primarily
through the use of repeating the game for long-term positive results.
http://www.vanderbilt.edu/Econ/faculty/Schwartz/econ235/CHAP08.PDF

The Prisoners' Dilemma
"You all know the prisoners' dilemma, right? A bunch of prisoners in a
prison with walls low enough to scale if they all cooperated. However,
if they give in to mutual distrust and attempt to gain advantage over
their fellow prisoners, all stay stuck in prison.
"That's precisely where we are in the competitive local telecom
business. As the financial markets have gotten tougher and CLECs have
had to fight harder than ever to grow their revenues, shrink their
costs, and reach profitability; we have seen the development of
behavior that makes it harder to reach these goals."
http://www.xchangemag.com/articles/181policy4.html

The Prisoner's Dilemma in Business
"Business life is rife with prisoner's dilemmas including the
employer-employee relationship and that between vendor and customer."
http://www.spectacle.org/995/bus.html

Lecture 5
"5. Business applications of the prisoners' dilemma equilibrium: price
wars, advertising wars (eg, beer companies) and any competition which
hurts both competitors. Realize that the prisoners' dilemma is
perverse from the group interest of the firms but it is good for the
interests of society and efficiency of the market. Lawsuits are also
examples of noncooperative equilibria.
http://www.bus.utexas.edu/faculty/stephen.magee/Lecture%205.doc

I hope you find these resources useful.  Best wishes,

mvguy-ga




Google search term used: "prisoners dilemma" business
://www.google.com/search?num=25&hl=es&ie=UTF-8&oe=utf-8&q=%22prisoners+dilemma%22+business&btnG=B%C3%BAsqueda+en+Google

Answer well developed. Thanks,

That's a tough one to answer, many dilemma type situations arise in
everyday life. To be a 'prisoners dilemma' the utility functions of
the companies would have to yield equal anticipations from both
companies viewpoints, very unlikely.  It's also interesting to note
that the prisoners dilemma is an example of a failure of traditional
game theory in economic situations.  Check out William Poundstone's
'Prisoners Dilemma' for a very non-technical consideration of real
world dilemmas.  For an in-depth look at what economic situations game
theory can be used successfully in, I've found no better than Oskar
Morgenstern and John von Neumann's 2nd ed. (1947?) of 'The Theory of
Games and Economic Behavior', and it only requires a hint of calculus,
other than that just basic high school set theory and algebra to
understand most everything in the book.