Game theory: An example of the prisoner's dilemma in the real world is when two competitors are battling it out in the marketplace. Often, many sectors of the economy have two main rivals. There can be rivalry such as between du and Etisalat in Telecommunications services, Coca-Cola and Pepsi-Cola in soft drinks. Suppose du plans to cut its price. Etisalat will likely follow suit to retain its market share. This may end up with low profits for both companies. A price drop by either company may thus be construed as defecting since it breaks an implicit agreement to keep prices high and maximize profits. Thus, if du drops its price but Etisalat continues to keep prices high, du is defecting, while Etisalat is cooperating (by sticking to the spirit of the implicit agreement). In this scenario, du may win market share and earn incremental profits by selling more.

Game theory: An example of the prisoner's dilemma in the real world is when two competitors are battling it out in the marketplace. Often, many sectors of the economy have two main rivals. There can be rivalry such as between du and Etisalat in Telecommunications services, Coca-Cola and Pepsi-Cola in soft drinks. Suppose du plans to cut its price. Etisalat will likely follow suit to retain its market share. This may end up with low profits for both companies. A price drop by either company may thus be construed as defecting since it breaks an implicit agreement to keep prices high and maximize profits. Thus, if du drops its price but Etisalat continues to keep prices high, du is defecting, while Etisalat is cooperating (by sticking to the spirit of the implicit agreement). In this scenario, du may win market share and earn incremental profits by selling more.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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