Every film noir(crime drama) involves a Prisoner's Dilemma. In all movies of this genre, nobody's motives are quite clear and the characters have the opportunity to forge bonds of loyalty or to betray each other.
In a typical heist film, freelance criminals team up to commit a robbery. If all cooperate, they will each receive a proportional share. If one betrays the others, he will take all, and the rest will have the sucker's payoff. If all(or most) betray, they can't really coordinate their actions so they end up getting caught(or killed).
We already know that the only way to solve a typical Prisoner's Dilemma situation is through cooperation. But most individuals, acting in self-interest, will try to cheat, knowing that they can achieve a better outcome. Knowing this, we should use a supporting strategy that helps to achieve and maintain cooperation.
As depicted in The Godfather, a strategy that gangs may use is to punish acts of defection(cheating) bloodily. This strategy, in game theory, is called Tit-for-Tat and it was first proposed by University of Michigan political scientist Robert Axelrod. He describes it as a variation of the "eye for an eye" rule: do unto others as they have done onto you. More precisely, the strategy cooperates in the first stage and from then on it mimics the behaviour of the opponent: if they cooperate, you should cooperate; if they cheat, you should cheat/punish. Mr. Axelrod claims that Tit-for-Tat meets all the demands for a good choice of punishment in an iterated Prisoner's Dilemma situation: it is clear and simple (so that an opponent thinking of cheating can easily foresee the consequences), nice (it never initiates cheating), provocable(it never lets cheating go unpunished) and it is forgiving(is willing to restore cooperation if your opponent reverts to cooperation).
The big advantage of this strategy is that it always comes close. At worse, Tit-for-Tat gets beaten by one defection(in the first stage) and then ties from then on. However, in the real world, where misperceptions(mistaking other actions as defections) are possible, this strategy is flawed. Misperceptions cannot be avoided in real situations and applying Tit-for-Tat might produce disastrous results.
For instance, in 1987 the U.S. responded to the Soviet spying and wiretapping of the U.S. embassy in Moscow by reducing the number of Soviet diplomats permitted to work in the United States. The Soviets responded by withdrawing the native support staff employed at the US and placing tighter limits on the size of the American delegation. As a result, both sides found it more difficult to carry out their diplomatic functions.
The problem with Mr. Axelrod's strategy is that a single mistake will trigger a never-ending chain reaction of punishments.
A better alternative for Tit-for-Tat is what Professors Dixit and Nalebuff provide in 'Thinking strategically': we should be more forgiving when defection appears to be an exception and punish when it appears to be the rule. That of course means keeping count of the number of times the other side appears to have defected. When the percentage becomes unacceptable then we should punish by reverting our strategy to Tic-for-Tat and keep using this strategy for a set amount of time.
What Mr. Dixit and Mr. Nalebuff propose is basically a modified Tic-for-Tat that is a little bit more forgiving, taking into account the fact that in the real world mistakes are possible.
However, real life situations of the prisoner's dilemma are much more complex and have much more variables than just the percentage of defections and the probability of misperceptions.
My opinion is that you should use any advantage that you might have(i.e.:greater market share) or any measures that are available to you in order to impose a specific action on your opponent. You should force him to adhere to the action that you agreed upon while you may defect more often.
Lets take the example of the classical clash over economic policy between the government and the central bank of a country X. Without getting into too much detail, we know that the government often favors an expansionary fiscal policy(because it reduces unemployment) while the central bank prefers a contractionary monetary policy(to reduce the risk of inflation). If X's government considers that the country could afford it, then their best outcome would be an expansionary policy(both fiscal and monetary). Since the central bank usually ranks reducing the risk of inflation as their highest priority then their best outcome would be a contractionary policy(both fiscal and monetary). If they would combine their preferences(expans. fiscal pol. with contract. monetary pol.), the result would lead to high interest rates and a budget deficit which would favour X's currency(because the int. rates would attract foreign capital) but it would hurt its market competitiveness(again because of the high interest rates). The opposite(fiscal contraction and monetary expansion) would produce low interest rates(which would favour market competitiveness) and a low currency. In many real cases, fiscal contraction and monetary expansion is preferred over the opposite. Thus we can easily see that this is a prisoner's dilemma. Both institutions have dominant strategies which combined lead to the worst outcome.
The obvious answer would be to cooperate and create a system that deters cheating. For the greater good(both for the market and maybe even the country's production) this should be the answer. But, in most countries, the government has control over the central bank. This is an obvious advantage. If the government's only goal is to achieve a complete expansionary policy, it can easily do that by imposing the central bank to continue using an expansionary policy while they will change their policy and adopt an expansionary one too.
Lets take another example. Consider the hypothetical case of two firms, firm A and firm B, battling over market share in a specific region. Both firms have to decide whether advertising in that region would increase their profits or not. This is, of course, a prisoner's dilemma. Advertising while the other firm doesn't is the ideal outcome, because it would increase popularity relative to the others thus giving greater market share. If both firms advertise then the sales will remain the same but the expenses will increase thus lower profits. If nobody advertises then the receipts and the expenses will be the same.
Therefore the logical answer is to cooperate to not advertise in that region. But if, lets say, firm A already has a decent market share advantage over B then they should advertise. The expenses for advertising will be the same for both firms. Since firm A has greater profits(because even a slightly bigger market share can result in much greater profits), the additional expense won't feel that important as it will for firm B. Thus firm B will accept the loss in market share and the loss in profits that will occur because of A's popularity or might even exit the market for that region altogether. Advertising could result in an even bigger loss of profits.
The conclusion that I am trying to reach is that the real world has many variables and is much more complex. A typical notebook prisoner's dilemma situation will rarely occur. Opponents will always have advantages or disadvantages or even different payoffs. If you are looking to engage in such a game with a stronger opponent then you should find a way to level the playing field(i.e.: form alliances with the weaker opponents).
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