not the other, she can reward the confessor with a B. The professor brings both
students, one at a time, into her office and gives each the following deal:- If you remain silent and do not confess, and your classmate implicates you, I will expel
you from school and give your friend a B. - If you confess to cheating and implicate your silent classmate, I will pass you with a B
and expel your friend from school.
These options are depicted in the following matrix:
Diane doesn’t know what Jack is going to do when he is in the professor’s office. But
whatever Jack’s decision, Diane should confess. She might be thinking that Jack is going to
confess. If so, she confesses because staying silent will get her expelled from school. Maybe
she thinks that Jack is going to stay silent. If true, the choice is between a B and a D in the
course. Diane would be wise to confess. For Diane, confessing is a dominant strategy
because no matter what Jack does, confession is always better than staying silent. Likewise,
for Jack, the dominant strategy is to confess.
This is certainly a dilemma, because if Jack and Diane could only agree to give the pro-
fessor the silent treatment, they would both walk away with a D, which is much better than
failing the course or expulsion from school. Without such a binding agreement, cheating
on the pact would be quite tempting, maybe even fairly predictable.
Example:
The owners of two gas stations operate on opposite corners of a busy intersection.
Every morning each owner goes out to the sign and sets the price of gasoline,
either high or low. Consumers are concerned only about the lowest price of gas.
The following matrix summarizes the daily revenues for each station:Can you see the dilemma? Both stations would love to set a high price of gas so that
they could earn $2,000 in daily revenue. But if the rival were to set the low price, the high
price station would be stuck with $500 while the other station cleans up with $3,000. Since
both firms recognize that pricing low is the dominant strategy, both earn only $1,000 every
day. A collusive agreement might emerge.
STATION X
Price High Price Low
Price High X: $2,000 X: $3,000
STATION Y Y: $2,000 Y: $500
Price Low X: $500 X: $1,000
Y: $3,000 Y: $1,000JACK’S CHOICES
Confess Stay SilentConfess D: Fail the course D: Gets a B
DIANE’S J: Fail the course J: Expelled from
CHOICES school
Stay Silent D: Expelled from school D: Gets a D
J: Gets a B J: Gets a DMarket Structures, Perfect Competition, Monopoly, and Things Between ‹ 135