What Is an Example of the Prisoners' Dilemma When Applied to Economics?

An example of the prisoners' dilemma applied to economics might be two competing firms selling similar products that find if one lowers their prices, the other has to follow, which ultimately leaves them both with less profit than if they had simply kept prices high. The high price can be likened to the prisoners remaining silent, in that it is better for both to take no course of action rather than try to get ahead of the other by confessing, or in the case of economics, exploiting greater sales with lower pricing.

The prisoners' dilemma itself was developed by RAND scientists, before being formally recognized by a Princeton mathematician. The strategy, although common to social science, can be applied to a number of other fields, including politics.

The traditional version of the dilemma involves two suspects being held by the police. Both are encouraged to confess in order to reduce their punishment, but if one confesses, the other will have to follow suit (although the last to confess will not receive the benefits as much as the first).

Ultimately, both prisoners are better off remaining silent, as a confession from each of them only makes the situation worse for both. Confession is therefore the dominant strategy, but also the worst option.