1. © 2012 Noordhoff Uitgevers Seen in many American Tv-series Prisoner’s dilemma

2. © 2012 Noordhoff Uitgevers Prisoner’s dilemma 2 bad guys, each in a separate room, Being interviewed by the most popular cops in the series Each prisoner being pressured to ‘snitch’ on the other The one who talks first gets a plea bargain If the other confesses first, the one who does not confess is ‘fried’ If they both confess the deal is not as favourable

3. © 2012 Noordhoff Uitgevers Prisoner’s dilemma Incomplete or asymmetric information

4. © 2012 Noordhoff Uitgevers An example The prisoners killed someone, but if they both deny this they can only be charged for weapon possession, as nothing links them to the murder. Pay-off matrix prisoner 2 confesses prisoner 2 denies prisoner 1 confesses5 years / 5 years0 year / 10 years prisoner 1 denies10 years / 0 year1 year / 1 year

5. © 2012 Noordhoff Uitgevers The pay-off matrix explained Each prisoner will receive a jail sentence of 1 year if they both deny the charge (1 year / 1 year). If they both confess, they will each receive a sentence of five years (5 years/ 5 years). If prisoner 1 confesses and prisoner 2 denies, prisoner 1 will be offered protected custody and he will not face a jail sentence. Prisoner 2 will receive a 10 year sentence (0 year / 10 years) Vice versa if prisoner 1 denies and prisoner 2 confesses (10 years / 0 year).

6. © 2012 Noordhoff Uitgevers Nash Equilibrium None of the participants has an interest in changing strategy because the players are playing a best response to each other. A Nash equilibrium is not necessarily the most desirable outcome (Pareto optimum) for any or all of the participants.

7. © 2012 Noordhoff Uitgevers Credible threat If one of the prisoners is convinced the other will kill him, he might make a different decision.

8. © 2012 Noordhoff Uitgevers Prisoner’s dilemma and cartel agreements

9. © 2012 Noordhoff Uitgevers Case Study : Soft and Pep Pep blows the whistlePep doesn’t talk Soft blows the whistle € 35 million / € 35 million€ 0 / € 50 million Soft doesn’t talk€ 50 million / € 0€ 10 million / € 10 million Pay-off matrix

10. © 2012 Noordhoff Uitgevers Case Study : Soft and Pep (continued) Pep blows the whistlePep doesn’t talk Soft blows the whistle € 35 million€ 0 Soft doesn’t talk€ 50 million€ 10 million Pay-off matrix Soft

11. © 2012 Noordhoff Uitgevers Case study : Soft and Pep (continued) If Pep blows the whistle, Soft is also better off blowing the whistle. The fine will be €35 million instead of €50 million. If Pep doesn’t talk, Soft will still be better off blowing the whistle. The fine will then be 0 compared to €10 million. No matter what Pep decides, Soft is always better off by blowing the whistle. The same applies for Pep. This is a Nash equilibrium because both Soft and Pep will blow the whistle and receive a €35 million fine each, which is not the best result for either party.