The “prisoner’s dilemma” explains a situation of distrust: The individuals A and B had been members of a criminal gang and got caught by the police. In the cell they swore not to say anything, as this would present they best combined result for the two of them. There is not enough evidence to accuse them for their complete crimes, so if no one of them would start confessing, they just could be jailed for 1 year. The police offered them separately each of them a deal that if they would start talking and blaming their partner, they will be set free, but on the other hand their partners had to stay 3 years in prison. Ideally the police would need both starting to talk, so that they would have enough evidence to send both of them for 2 years to prison.

The prisoner’s dilemma consists of the two possibilities: confess or not to confess. Important in this situation is, how much the individuals trust each other. They know that the police talk to both of them with the same proposal. In a climate of distrust, they assume that the other individual cooperates with the police, for this also start to confess. Or they trust that the other one refuses to speak and then confess to get an advantage against the other prisoner. Either way, in most of the situations, both confess to receive an advantage, but with the result that they together achieve the least positive possible solution.

In the example, even if they had sworn something different, both gangsters first of all thought of their personal benefit and decided to start blaming each other. The result was that instead they maximized the overall result, through their try to get the best personal result, at the end they both ended up sent for 2 years to jail, what is the worst overall result.[1]

PD

This model often gets used in team-buildings to explain the benefit of good and trustful collaboration. But beside this, it can also explain competition in mature or saturated markets. Here A and B represent independent companies. In a growing marketing the companies show a friendly and respectful behavior with each other, as both can turn non-clients into clients. This treatment changes in the later mature or saturated markets. There are only a non-significant number of non-clients, so at the moment both companies try to keep their status quo. Even without participating in a legal or illegal cartel, both players have a good idea of each other’s prices, capacities, quality, etc. With “1/1” they achieve the best possible combined result for them. On the other hand the total of “2” represents the clients’ benefit.

A healthy company requires regular growth, this to satisfy its stakeholders, but further to motivate its employees. Due to this, it is only a question of time, until one of the companies will start to violate the non-spoken agreement and try to win market-shares. Both are locked up in their cells and only can assume what the other will do next, we have a situation of distrust.

If diversification is not possible, winning market shares means lowering prices. With “0/3” or “3/0” the company, what lowered its prices gained a temporal benefit. Also it is for the clients’ benefit, what shows the total of “3”.

As every action provokes a counter-action, the other company will follow and lower its prices. The second company gains market shares again, but the total earning of the market lowered 2 points since the beginning. These two points earned the clients thanks to the companies’ competition. Their benefit grew to “4”.

Alcatraz

As A and B are inside the prison and do not see a possibility to escape, they may be tempted to secretly meet inside closed walls and agree on prices and strategies. Or maybe the prison management allows them to move into a double-cell. Here they can work officially together or in other words, both companies can merge into a joint-venture. Both steps would limit the market and could lead to higher prices again. A more favorable solution would be that the clients’ use their savings to buy more, which would be also to the benefit of the companies. But, of course, they could also take the money and spend it on another market.

We can take the prison-model further, as it not only explains competition and antitrust-risks, but also illustrates Compliance risks. For management, mature until shrinking markets may get perceived as being inside a prison, as no new non-clients mean no places to step out the given territory of the market. With the pressure to gain grow, the environment gets perceived as hostile and the competitor as enemy, similar as the atmosphere inside many jails. As the companies feel as in a war-like situation, the tone from the top gets aggressive and may be interpreted by middle management or other employees, as this is an approval to by-pass certain guidelines and laws. Continuing with the analogy, the Compliance Officer will be seen more as the prison guard instead of the trusted colleague. Overall, it is an important task for the company to overcome this situation, if not; it will lead, similar to the “prisoner’s dilemma”, to the least positive output. A key to open the door is a possible competitive advantage, which can be new products or production processes, but also a focus on the client, ethics and integrity.

Sources:

Henz, Patrick (2015): “Business Philosophy according to Enzo Ferrari – from motorsports to business”

[1] Tucker, Albert William (1950): “A Two-Person Dilemma – The Prisoner’s Dilemma”

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