Slides By Timothy Diette and Kevin Brady

1. Interactive Examples Prisoner’s Dilemma Begin To navigate, please click the appropriategreenbuttons. (Do not use the arrows on your keyboard) Material from this presentation can be found in: Chapter 10 Slides By Timothy Diette and Kevin Brady CoreEconomics, 2e

2. Interactive Examples Prisoner’s Dilemma • QUESTION: • Assume there are two pizza restaurants in town: Angie’s Pizza and Eddie’s Pizza. They have to decide on whether to advertise or not. The strategies and the payoffs of each player are represented in the table to the right. • Do the players have a dominant strategy? • What is the equilibrium outcome? Eddie’s Pizza’s Payoff Angie’s Pizza’s Payoff Answer

3. Interactive Examples Prisoner’s Dilemma • ANSWER: • Do the players have a dominant strategy? • A dominant strategy is a strategy that has a higher payoff than any other strategy no matter what the other player does. • Consider the options for Angie’s Pizza. She will focus on whether the payoff to either strategy is better no matter what strategy Eddie’s Pizza selects. • The payoff to Angie’s Pizza is the first number in the parentheses in each box. If Eddie’s Pizza chooses Advertise then Angie’s Pizza gets a higher payoff by choosing Advertise ($400 instead of $250 if she chose Do Not Advertise). If Eddie’s Pizza chooses Do Not Advertise then Angie’s Pizza gets a higher payoff by choosing Advertise ($800 instead of $700 if she chose Do Not Advertise). • Therefore, Angie’s Pizza has the dominant strategy of Advertise. Next Eddie’s Pizza’s Payoff Angie’s Pizza’s Payoff

4. Interactive Examples Prisoner’s Dilemma ANSWER: Now consider the options for Eddie’s Pizza. He will focus on whether the payoff to either strategy is better no matter what strategy Angie’s Pizza selects. The payoff to Eddie’s Pizza is the second number in the parentheses in each box. If Angie’s Pizza chooses Advertise then Eddie’s Pizza gets a higher payoff by choosing Advertise ($400 instead of $350 if he chose Do Not Advertise). If Angie’s Pizza chooses Do Not Advertise then Eddie’s Pizza gets a higher payoff by choosing Advertise ($900 instead of $700 if he chose Do Not Advertise). Therefore, Eddie’s Pizza has the dominant strategy of Advertise. Next Eddie’s Pizza’s Payoff Angie’s Pizza’s Payoff

5. Interactive Examples Prisoner’s Dilemma ANSWER: 2. What is the equilibrium outcome? Eddie’s Pizza and Angie’s Pizza both have the dominant strategy of Advertise. Therefore, the equilibrium is both restaurants selecting Advertise. This outcome is an example of the prisoner’s dilemma. Recall that the prisoner’s dilemma describes situations where the pursuit of individual interests leads to a group outcome that is in the interest of no one. In this game, both players would be better off if they could coordinate their actions and both select Do Not Advertise. Eddie’s Pizza’s Payoff Angie’s Pizza’s Payoff The End