The Prisoner's Dilemma and Competitive Strategy

The Prisoner's Dilemma is a concept from the field of Game Theory, or the study of strategic decision making. It shows that individuals (and companies) are likely not to cooperate, even if it is in their best interest to do so.The scenario is as follows:Two criminals are arrested, but police can't convict either on the primary charge, so they plan to sentence them each to 5 years in jail on a lesser charge. Each of the prisoners, who can't communicate with each other, is given the option of testifying against their partner. If they confess, and their partner denies, the partner gets 20 years and they go free. If they both confess, both get 10 years. If they both deny, they each get 5 years.They each consider their options, and knowing that they have no control over what the other is going to do, they reason that they are better off confessing regardless of what their partner does. If they choose to deny, they are at the mercy of their partner, and they are not willing to be in that position.Obviously, if the suspects had the opportunity to discuss their options with each other, they would have decided on mutual denial and shared the 5 year sentence. However, since they are shut off from each other, as companies are when making simultaneous commercial decisions, they each end up acting selfishly by confessing and accepting the 10 year sentence.Many situations in life mirror this behavior. Athletes deciding whether or not to use performance enhancing drugs to gain a potential advantage over their competitor or political parties arguing over taxation versus spending are examples. In sports, the perceived advantage is negated when the competitor also decides to cheat, and now the personal health of both has been compromised as a result. In politics, we find ourselves in a stalemate, with high spending and low taxes keeping us in a fiscal imbalance, and we are all feeling the results of that!


So how is YOUR Company being affected by the Prisoner's Dilemma concept? If you are a manufacturer or distributor of a commodity product, your advertising and promotional strategies are largely dependent on what your competition is doing in these areas. Using advertising as the example, neither the total market size nor sales to the total market will increase as a result of your efforts. That is, if you make and sell toothpaste, people will not brush their teeth more if you advertise your product. What you stand to gain is more market share, but it will be at a cost.If neither you nor your competition are advertising your respective products, you will keep your market share and be more profitable because there are no advertising costs. However, the reality is that you all made the decision to advertise, as it is a dominant strategy. If all of the advertisements are equally effective, then your market share has not improved but your costs have gone up. What have you gained?The key to increasing market share through advertising, then, is to make sure your advertising strategy is MORE effective than your competition's.