The Prisoner’s Dilemma

By Sarah Warren, MBA

Note: The following blog is a sneak peak of an article to be published in the upcoming Chamber Connection (April 2011), the monthly newsletter of the Ruston Lincoln Chamber of Commerce.

The Prisoner’s Dilemma is the granddaddy of all economic game theories.

Game theory is a way of predicting behavior in strategic situations. The Prisoner’s Dilemma applies to simultaneous decision making and helps explain why individuals/businesses don’t cooperate even if it’s in everyone’s best interest to do so.

It’s really best explained by the illustration for which it’s named:

Two suspects are arrested by the police. The police have insufficient evidence for a conviction, and, having separated the prisoners, visit each of them to offer the same deal. If one testifies for the prosecution against the other (defects) and the other remains silent (cooperates), the defector goes free and the silent accomplice receives the full 10-year sentence. If both remain silent, both prisoners are sentenced to only six months in jail for a minor charge. If each betrays the other, each receives a five-year sentence. Each prisoner must choose to betray the other or to remain silent. Each one is assured that the other would not know about the betrayal before the end of the investigation. (Thanks to Wikipedia for help summing this up!)

Obviously the best outcome would occur if both suspects keep their mouths shut, but for all the reasons that make people people—namely self-preservation—the most likely outcome is that both will betray the other and get a 5-year sentence.

So how does this apply to marketing?

Take advertising for example. Holding everything else constant, two competitors are financially better off if neither one advertises. Here’s why:

Say two companies split their market 50/50. Realizing that advertising will allow it to acquire more customers than Company B, Company A begins to promote its services. One of two things is going to happen:

1) B will more than likely come to the same realization and make the exact same decision concurrently. Holding all things equal, A and B remain at a 50/50 split.

2) If for some reason B didn’t make the same move at the same time, A may briefly gain market share; but B will quickly follow suit to keep from losing its share to A. Again, holding all things equal, A and B are likely back to a 50/50 split.

In either situation, advertising causes both companies to lose profit because they are spending money to keep their original 50/50 split. The clincher is that neither can stop advertising unless both do.

Now, of course, that “holding everything else constant” is a big catchall and nothing is ever constant or perfect; however, it’s fair to say that if one company begins to advertise a competitor really has no option but to do the same. And really that statement applies to all strategic decisions… product line additions, service improvements, staffing changes, facility openings, social media participation, and so on. If one company in an industry does something, everyone in the industry should really do the same or risk losing market share.

But take a quick look back at scenario #2 from above. The quiet lesson here is that it’s better to make the first move because of the possibility of incremental market share gain; but, as that gets us into a “first to market” discussion, more on that will have to wait for another day.

Until then, consider what “prisoners’ dilemmas” face your industry and you’ll likely discover areas of weakness and opportunity.

Sarah Warren is the co-owner of Emogen Marketing Group, a full service marketing firm in Ruston, LA and can be reached at sarah@emogenmarketing.com.