Prisoner’s dilemma is a paradox of decision-making which means that if two individuals make decisions concerning only their self-interest then the result would not be in an optimal solution. A.W Tucker, a Canadian mathematician gave the modern interpretation of prisoner’s dilemma. The essence of the concept is that even a strategy which may seem attractive may have worse results. Such strategies are placed during non-cooperative situations. This may occur in various segments of the economy.
In order to overcome a prisoner’s dilemma, one should develop methods during decision making which have better collective results even though the individual or personal incentive may not always be favourable. The parties facing such a course have the opportunity to choose whether to cooperate or not.
Prisoner’s dilemma is best used during risk management and planning strategic competitive pricing. For example, let’s take Firm A and Firm B, both sell similar products. When both charge a higher price and exploit the market, they make a profit of Rs. 100 crores per month. Now if Firm A sets a competitively low price it gains more customers and profits rise to Rs. 120 crores while those of Firm B fall to Rs. 70 crores. If both set low prices then both the firms will gain a profit of Rs. 90 crores. Now even though setting low competitive pricing would be a dominant strategy, but when both the firms exercise the same it would result in a worse effect. Hence, cooperating on mutually low pricing (in this case where the firms gain a profit of Rs. 90 crores) would be a way to get out of prisoner’s dilemma.
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