Posted by: Ikhsan Madjido | April 10, 2010

Prisoner’s Dilemma, Nash Equlibrium, Tit-for-Tat: to Manage Competitors?

Nash equilibrium is a situation where each player chooses its optimal strategy, for dealing with strategies that have been done by other players.
But sometimes there is a cheating and did not follow the agreement so that the outcomes tend to be inferior even worse than the possibilities.
Once upon a time we walk into Glodok intend to look around and if there is a match going to buy a laptop. After much haggling the seller would not sell below the price even though we bought a laptop for more than two pieces. Finally the guard booth to take us to the manager to speak four mata.Si manager finally put a price below the standard but the price written on the receipt is higher than the agreed price. The manager asked for the secret of this and if anyone asks, the answer is as indicated in the receipts.

Prisoner dilemma illustrates that the agreement of two economic actors is very difficult to continuously even though the agreement is beneficial to both the perpetrators. This occurs because of an agreement means that economic actors commit to choosing a particular strategy in a game. Thus, although the game has not yet begun, each economic actor to understand the strategy of his opponent. Each economic actor assumes that his opponent’s strategy as a key factor. As a result, each potential economic actors to choose a different strategy than the strategy agreement, if the violation is more profitable than follow the consensus strategy.
To prevent cheating when there is repetition in the prisoners dilemma scenario, the best strategy that can be achieved is a tit-for-tat.
In order for the strategy tit-for-tat can function properly, several conditions must be met. First, it needs a stable set of players. If players are often switching back and forth, growing a small possibility of cooperative behavior. Second, the number of players have little (if not, it is very difficult to monitor what is being done by each player). Third, it is assumed that any company can rapidly detect (and are willing and able to respond quickly) cheating by other companies. Cheating is not detected in a long time will encourage more cheating. Fourth, demand and cost conditions should be relatively stable (it is always changing, it is very difficult to define where the cooperative behavior and what is not). Fifth, we must assume that the game continues again and again without limit, or in a very large number of repetitions and uncertain.

In everyday life, especially in the business world, the rules of play tit-for-tat is able to minimize cheating. It can be described as follows: Do what to you by your opponent. That is, you start by cooperating and will continue to work together during your opponent also cooperated. If he betrayed, then you also betray him again. If later he was cooperating, then you also work together. This strategy is adequate reply to each other in order to prevent non-cooperative behavior, but forgiving enough to allow the development pattern of cooperation is beneficial.
However, many phenomena around us are still cheating occurred. This is due to inconsistent implementation of this strategy is applied, where the punishment is not carried out properly. Do unto Others as you would have Them do onto you.

Source: “Managerial Economics” by Dominick Salvatore


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