The Prisoners' Dilemma in the Airline Industry

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The Prisoners’ Dilemma in the airplane industry

Games of Strategy Home Assignment

Tamás Seres

Introduction 3
The Prisoners’ Dilemma 3
An Oligopolistic market: 5
The Case Study 6
Conclusion 8
References: 8


In today’s world the Prisoners’ Dilemma is a common phenomenon in business, politics and in social life as well. This paper will analyze a real life example. It will describe the airplane manufacturing industry and their two giant manufacturers: Airbus and Boeing. The two companies find themselves in a business environment where both parties take the others decision into consideration and act in respect of those. The companies can have two choices: to cooperate with each other for higher
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Therefore they have to keep in mind what the other suspect is thinking.
The rational reasoning of John is the following (the same applies for Bob): • If John assumes that Bob will cooperate (does not confess), then for John the optimal strategy is to confess, because with this act he would be immediately set free, but if he does not confess then he needs to stay in prison for ½ year. • If John assumes that Bob will defect (confess), then also the best choice for John is to confess, because then he only needs to stay in prison for 5 years, which is less than the 10 years what he would get if he would not confess (cooperate).
The analysis shows that the dominant strategy for both parties is to confess and therefore they will both get 5 years. In this case the Nash equilibrium is confessing. On the other hand it results a worse outcome if they would cooperate (6months instead of 5 years). This is not the Pareto efficient outcome, in which both parties have the highest payoff possible and one can only achieve higher payoff by hurting the other. In the Prisoners’ Dilemma the Nash equilibrium does not equal with the Pareto efficiency.

An Oligopolistic market:

The definition of an oligopoly is the market condition in which the production of identical or similar products is done by a small number of big firms. Oligopolies can be categorized in to two types: homogenous oligopolies where the product is exactly the same (e.g.: steel production)
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