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eolecki's picture

Economic Incentives

In my economics class we looked at a fairly similar example to prisoners dilemma.  Two business that could either choose to produce at high production or low production.  If they both did low both companies got a profit of 300, if they both did high they got a profit of 30, and if one did high and one did low the one that did high got 400 and the low got 10.   So, people have been saying that they are cooperative in real life and would rather know that they were being cooperative than competing.  In economics the main idea is that people respond to incentives.  Would you rather have $400, $300, $30, or $10?  Well of course you want $400.  From this situation, economic theory says both firms will produce high and only get $30.  Why? because both firms have an incentive to produce at high levels.  If both firms have one chance to make money both are going to try and make a higher profit because to matter what the other one chooses they will have a better chance off high production.  If one firm produces high and the other produces low the first gets $400 instead of $300 and if the other firm produces high then they get $30 instead of $10.  So clearly the best economic decision is always to compete.  However, there is an exception if there is going to be repeated interaction and the firms can work together to both get high profits ($300) at low production.  But this agreement has to include punishment for firms that cheat the system. 

I played the game differently than a lot of people because I was viewing it in terms of economic incentives rather than with the principle of cooperation or competition. 

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