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Economics 101: Repetition and retaliation are solutions to prisoner’s dilemma

Punishment is an asynchronous activity – it is a response to someone else’s actions, not something that you carry out simultaneously to your being mistreated.

Individuals pursuing their own best interests sometimes set up the worst outcomes for a group – known as the prisoner’s dilemma. One manifestation of this problem in the GCC is the limited role for e-commerce, where buyers and sellers do not trust each other enough to conduct an online transaction. How can repetition help solve the prisoner’s dilemma?

In the prisoner’s dilemma, each person has the choice between behaving opportunistically (defection) and responsibly (cooperation). The best possible outcome is multilateral cooperation but it is difficult to realise because each person benefits unilaterally from defection.

In particular, defection benefits the defector at the expense of other players. This means that defection has two properties – it serves an individual’s immediate interests and it can serve as a way of punishing others.

Punishment is an asynchronous activity – it is a response to someone else’s actions, not something that you carry out simultaneously to your being mistreated. Since the prisoner’s dilemma is generally applied to simultaneous-move environments, if you find yourself playing a one-off prisoner’s dilemma (like the two prisoners in the original parable), then by the time you realise that you have been wronged and want to take retribution, the game is over and you have no recourse.

Repeating a prisoner’s dilemma is a game-changer because it offers players the chance to retaliate. More importantly, the threat of retaliation can sometimes be strong enough to motivate people to cooperate in the first place. When is this threat strong enough? A group of economists proposed a series of conditions, known as the Folk Theorem. There are two conditions necessary for the threat of retaliation to induce cooperative behaviour. First, the punishment has to be painful for its recipient. Second, the recipient has to care enough about the future, also known as exhibiting sufficient farsightedness, because all punishments are necessarily delayed. If, for example, one of the parties is leaving town the next day or is incredibly impulsive, then even the threat of a severe punishment is insufficient to scare them into virtuous behaviour, and defection will prevail.

In the context of online sales in the GCC and beyond, when you imagine retaliating against an unscrupulous seller, you probably think of delivering bad online ratings or a scathing review. These are slightly more complex versions of the punishment conceived in the Folk Theorem and we will discuss them more in the next article. In fact, the most elemental counter-attack you have at your disposal is withdrawing your future custom.

In many cases, this is enough to get people to play cooperatively. For example, most people play a repeated prisoner’s dilemma with their electricity provider: you can choose whether or not to pay and the provider can choose whether or not to provide you with electricity. Online bill payments are prevalent in the GCC and elsewhere.

Should the company decide to defect, by cutting your electricity off, you can respond by not paying future bills, hurting its bottom line. Conversely, should you decide not to pay your bill, the company can cut your electricity off. For the most part, people pay their bill and receive electricity, because of the repetition of the transaction and the farsightedness of both parties. Note that both parties have more complicated punishment methods available but, generally, the most basic form suffices.

In the case of Opec members trying to coordinate output cuts, quota violations act as defection and punishment.

The historic 96 per cent defection rate indicates that there might be impediments beyond the punishment being too weak, or oil ministers being too short-sighted. In fact, a key challenge is devising ways of objectively detecting defections, before the repetition-mediated punishment can be determined.

In the next two articles, we will consider alternative solutions to the prisoner’s dilemma conundrum faced by Opec and others.

Omar Al Ubaydli is the programme director for international and geopolitical studies at the Bahrain Center for Strategic, International and Energy Studies, and an affiliated associate professor of economics at George Mason University in the US. He welcomes economics questions from readers via email (omar@omar.ec) or tweet (@omareconomics).

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Updated: January 14, 2017 04:00 AM

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