John reasons as follows: “William will plead either guilty or
innocent. If he pleads innocent, I will get a light sentence if I
also plead innocent but no sentence at all if I plead guilty, so
guilty is my better plea. If he pleads guilty, I will get a severe
sentence if I plead innocent and a medium sentence if I plead
guilty. So once again guilty is my preferred plea.”
William reasons in the same way and, as a result, they both
plead guilty and get a medium sentence. This non-cooperative
outcome is shown by the thick border. Note, however, that if
they had been able to communicate and coordinate their pleas,
they could have agreed to plead innocent and get off with a
light sentence.
The prisoners’ dilemma arises in many economic situations. We
have already seen an example of a two-firm oligopoly.
Economists use the basic structure of this simple game to
think about how firms compete in their decisions to build new