Laura M. answered • 01/18/21

Tutor specializing in Economics and Mathematics

Hi Cade,

Short synopsis of the Prisoner's Dilemma:

Adam and Bob have robbed a bank and been arrested. They are interrogated separately. Adam and Bob have the option to confess or to remain silent. If both remain silent they will be sentenced to one year on a minor charge. If one confesses while the other remains silent, the one confessing goes free while the other is sentenced to three years. However, if both talk, both will still be sentenced to two years. **Because Adam and Bob are both incentivized by the best choice of the other, they will end up each confessing.**

To duplicate this game, we assume that firms GW and P&M will assume that the other will advertise. Therefore even though it may have been better for each to not advertise, they will both advertise. We just then need to create a game to satisfy these conditions. To create payoffs, we know that if both firms don't advertise they will have a greater payoff, so we create a payoff for No Adv/No Adv that is above that of Adv/Adv. We then figure that if one company advertises while the other does not, they will take the profits of the other. Because each firm is incentivized by the possibility that if they don't advertise the other will advertise and take all of their profit, they will each advertise.

GW P&M

GW No Adv/No Adv Adv/No Adv

100/100 200,0

P&M Adv/No Adv Adv/Adv

0,200 **90/90**