Prisoners dilemma

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What is a prisoners dilemma?

In fact the prisoners dilemma is a situation which occurs often in reality. In this case the basic assumption is that each team in this case, this game (as in reality?) prefers better results to bad results and rather tries to maximize its own profits. Most companies, find it hard to make costs in order to ameliorate the situation in the total of the market. So a company is likely to strive for its own results and make its own hotel more profitable. But, as the market is limited, this means that you take away customers (and so revenues) from your fellow-competitors, which is bad news for them.

Promotion example

Let's have a look at this dilemma in a fictitious situation
Lets presume, in a city the hotels spending on promotion is as follows:

• Hotel 1 spends € 50.000 and has a good plan
• Hotel 2 spends € 100.000 and has a good plan
• Hotel 3 spends € 50.000 and has a good plan
• Hotel 4 spends nothing
• Hotel 5 spends € 100.001 and has a good plan

There is a lot of things influencing the decision of the customers, but let's just accept for a moment that the choice of customers for a hotel depends only on this promotion spending. The customers who are receptive to promotion will choose hotel 5 which has the highest spending on promotion. It is just one euro more than hotel 1 but still this one euro is very important and might bring a few more extra occupied rooms.
The spending of the other hotels will bring results as well, but relatively less per euro.

Chat

But what if they would have had a chat, just before the made their decisions and decided to lower their spending dramatically but keep the relative differences intact. So

• Hotel 1 spends € 500 and has a good plan
• Hotel 2 spends € 1.000 and has a good plan
• Hotel 3 spends € 500 and has a good plan
• Hotel 4 spends nothing
• Hotel 5 spends € 1.001 and has a good plan

The results would be practically the same, but all of the teams would have saved a lot of money! One big problem: this is legally not allowed, as it limits the working of the free market, of the competition.

Visualization of the Prisoners dilemma
Source: Commons Mediawiki

The most well-known example always used in explaining the situation is two suspects who are arrested by the police and separated from each other during interrogation. The police have insufficient evidence for a conviction, and visit each of them to offer the same deal:

• betray your mate and if he keeps quiet you go off free and he gets 10 years
• if both remain silent they only get six months each
• if both betray the other, each receives a five-year sentence.

The problem

There is a number of problems though.

• By law a few of these (price) agreements are not accepted
• The dilemma is, of course, that if one team changes its spending on promotion in spite of the agreement and spends € 2.000 the results could be spectacular.
• Consumers are not crazy. So if you try to organize prices you will run into Price elasticity and even a Buyers strike. Trying to get a branch rising their consumer prices all by the same amount is one of the most well-known manner to try to cooperate and have all teams/hotels benefit.

Very tricky by law, by reaction of the customers and because of the prisoners dilemma: one team does not raise the prices and will attract a lot of price-sensitive customers.

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