0:20

So in the toothpaste wars, we have Sensodyne and Colgate, choosing to

advertise or not to advertise. We found that it's a dominant strategy

for Sensodyne to always advertise because whatever Colgate does, if they don't

advertise, Sensodyne will advertise. If they do, again, Sensodyne will want to

advertise. And by the same token, Sensodyne choosing

to advertise means that Colgate is best off to advertise.

And if Sensodyne does not advertise again, Colgate will want to advertise.

So in this case, our Nash Equilibrium is for both firms to run the advertising

campaign. And this is actually what's called a

Prisoners' Dilemma. Because what's interesting in this

situation is that both Sensodyne's and Colgate's profits would be higher if they

chose not to advertise, right? Just go back, they both make 2.5 million

right now. But if they both could choose not to

advertise, they would make 5 million. So they could double their profits by

choosing not to run the ad campaign. But why don't they do it then?

What's the problem? Well, they have individual incentives to

advertise anyway. Regardless of what the other player does.

Remember, we talked about dominant strategies.

Dominant strategy here is to advertise, meaning that it doesn't matter if the

other firm advertises or not. It's always best, it's always profit

maximizing for a particular firm, Sensodyne or Colgate, to run the ad

campaign. All right.

So, it doesn't matter if the overall outcome will be best,

I will always choose to run the advertising campaign.

It doesn't matter what the other firm does.

2:11

This is what's called a Prisoners' Dilemma.

So Prisoners' Dilemma is a situation where there is a situation with a higher

profit for both players.

But individually speaking, both of them will want to not keep to that

outcome. So what's the nature of that Prisoners'

Dilemma? I said, well, where does this come from?

Well it could be because they just don't understand what they're doing.

Well, clearly not. Both players know the game inside-out.

They know who they are playing, they know what their strategies are and in

particular, they know what the payoffs are.

So they can figure out the numbers and they can figure out what

the profits are. The dilemma comes from the fact that they

both act selfishly. They both want to maximize their profits.

And that's why we get to a result that doesn't maximize joint payoffs, but only

individual payoffs. Okay, and that is the basic structure of

a Nash Equilibrium in the form of a Prisoner's Dilemma.

We have a better outcome, but both players individually will want to choose

whatever maximizes their individual profits.

And we end up in a worse situation. What I want you to do now is to have a

look at a couple of games and tell me which of those are Nash

Equilibria in the form of a Prisoner's Dilemma.

Okay? So which of the following situations are

actually Prisoner's Dilemmas. Okay, and I'll see you back after that.

Cheers, bye.