Prisoner's dilemma

The prisoner’s dilemma is a game where both players have a dominant strategy to defect, but if both act on it they end up in a suboptimal stable equilibrium — worse off than if they had both cooperated.

Payoff Matrix

• P1 prefers: I > II > IV > III
• P2 prefers: III > II > IV > I

Defect is the dominant strategy for both players — it produces a better outcome regardless of what the other player does:

• If P2 cooperates: P1 gets I by defecting vs. II by cooperating; defect is better.
• If P2 defects: P1 gets IV by defecting vs. III by cooperating; defect is better.

The same logic applies symmetrically to P2. So both rational players defect and end up in box IV, even though both prefer box II. Rational individual behavior produces a collectively worse outcome.

A game is only a true Prisoner’s Dilemma if Defect is the dominant strategy for all players and the resulting equilibrium is suboptimal.

While a market functions structurally as a prisoner’s dilemma, markets still manage to exist and function reasonably well, because the prisoner’s dilemma is embedded in a larger game with additional payoff structures — repeated interaction, reputation, legal enforcement — that change the incentives.

Similarly, the provision of public goods unravels into a PD: a rational individual will free-ride on the rest of society, but if all individuals are rational, all will free-ride and the public good goes unprovided.