A game theory concept showing the disadvantages of not being able to reach binding agreements. The name originates from a situation of two prisoners who must each decide whether to confess without knowing what the other will say, where a lighter penalty follows if you confess when the other does not. An economics example would be two duopolists, who each have to set their price without knowing what price the other is setting. A pay-off matrix can be constructed as follows, where 1 and 2 are the players and A and B the strategies: in this case A is price high and B is price low. The matrix shows the pay-offs, that is, profits, to 1 of the four possible combinations of strategies. A similar matrix can be drawn up for 2. 0198607679.prisoners-dilemma.1.jpg 1 knows that if 2 plays A, that is, prices high, 1 does better pricing low. Also if 2 plays B, that is, prices low, 1 does better pricing low. If no agreement can be reached, 1 will price low. For parallel reasons, so will 2. Thus they finish up each making profits of 3, when if they had both priced high they could each have made profits of 5. They may be unable to agree because anti-monopoly legislation forbids them to meet, or because they simply do not trust each other to keep to any agreement they reach. If they collude and each price high, their profits can be raised to 5 each.

• market entry
• market equilibrium
• market failure
• market forces
• market for lemons
• marketing
• market-maker
• market mechanism
• market power
• market prices
• market risk
• market share
• market structure
• Market, Unlisted Securities
• mark-up
• Marshall-Lerner condition
• Marshall Plan
• Marxian economics
• massaging statistics
• mass production
• material resources
• matrix
• maturity
• maximin
• maximization, utility