Prisoner's Dilemma

The Prisoner's Dilemma is the canonical game in which each player has a dominant strategy that, when both play it, yields an outcome that is Pareto-inferior to the cooperative outcome. In the lecture's marketing example each firm's payoff from "Hire" beats "Not hire" regardless of the rival's choice (6 > 5 and 4 > 3), so the unique Nash Equilibrium is (Hire, Hire) → (4, 4), even though (Not hire, Not hire) → (5, 5) would make both better off.

When to use

Identify a Prisoner's Dilemma structure whenever individual rationality leads to a collectively worse outcome — most importantly, in cartel collapse: cooperating on a low joint output is jointly best, but each firm has a unilateral incentive to cheat and produce more. Escapes from the dilemma require changing the game: repeated interaction (Folk Theorem / Tit-for-Tat), binding contracts, communication, or internalised social preferences.