This is a managerial economics presentation on "Game Theory: Prisoners Dilemma" , presented by myself Peerzada Basim. I am a Business student pursuing IMBA degree at University of Kashmir. I hope this presentation will suffice your need and curiosity of knowing what Game Theory is. Thank you.

1. PRESENTATION ON :-
GAME THEORY
PRISONER’S DILEMMA

4. This theory was developed extensively in 1950’s
by many scholars. This theory was later explicitly
applied to biology in the 1970’s , although similar
developments go back at least as far as the
1930’s. Game
theory has been widely recognized as an
important tool in
many fields. Eight game-theorists have won the
Nobel

5. A model of optimality taking into consideration
not only benefits less costs, but also in the
interaction between participants. Game theory
attempts to look at the relationships between
participants in a particular model and predict
their optimal decisions.
Game theory is a mathematical method for
analyzing calculated circumstances, such as in
games, where a persons success is based upon
the choices of others. More formally, “It is the
study of mathematical models of conflict and

6. An alternative term suggested “as a more descriptive
name for the discipline” is interactive decision theory.
Game theory is mainly used in economics, political
science and psychology, and other, more prescribed
sciences like logic or biology. The subject first
addressed zero-sum games, such that one persons
gains exactly equal net losses of the other participant.
Today, however, game theory applies to a wide range of
class relations, and has developed into an umbrella term
for the logical side of science, to include both humans
and non-humans, like computers. Classic uses include a
sense of balance in numerous games, where each person
has found or developed a tactic that cannot successfully

7. One frequently cited example of game theory is
Prisoner’s Dilemma.
Suppose, there are two brokers accused of
fraudulent trading activities: Wajahat and Maharif.
Both Wajahat and Maharif are being interrogated
separately and do not know what the other is
saying. Both brokers want to minimize the amount
of time spent in jail and here lies the dilemma. The
sentences vary as follows :-
1.If Wajahat pleads not guilty and Maharif
confesses, Maharif will receive the minimum
sentence of one year, and Wajahat will have to stay

8. 2.If nobody makes any implications they will both
receive a sentence of two years.
3.If both decide to plead guilty and implicate their
partner, they will both receive a sentence of three
years.
4.If Maharif pleads not guilty and Wajahat
confesses, Wajahat will receive the minimum
sentence of one year, and Maharif will have to stay
in jail for the maximum five years.

9. A paradox in decision analysis in which two
individuals acting in their own best interest pursue
a course of action that does not result in the ideal
outcome. The typical prisoners dilemma is set up
in such a way that both parties choose to protect
themselves at the expense of the other participant.
As a result of following purely logical thought
process to help oneself, both participants find
themselves in a worse state than if they had

10. Suppose two friends, Dave and Henry, are
suspected of committing a crime and are being
interrogated in separate rooms. Both individuals
want to minimize their jail sentence. Both of them
face the same scenario:

11. Dave has the option of
pleading guilty or not guilty. If
he pleads not guilty, Henry
can plead not guilty and get a
two year sentence, or he can
plead guilty and get a one-
year sentence. It is in Henry’s
best interest to plead guilty if
Dave pleads not guilty. If Dave
pleads guilty, Henry can plead
not guilty and receive a five-
year sentence. Otherwise, he

12. It is in Henry’s best interest to plead guilty if Dave
pleads guilty.
Dave faces the same decision matrix and follows
the same logic as Henry. As a result, both parties
plead guilty and spend three years in jail although
through cooperation they could have served only
two.
A true prisoner’s dilemma is typically “played” only
once; otherwise it is classified as an iterated
prisoner’s dilemma.

13. The normal game is shown
below :-

14. QUANTITY PRICE (Rs.) TOTAL REVENUE (Rs.)
0 120 0
10 110 1100
20 100 2000
30 90 2700
40 80 3200
50 70 3500
60 60 3600
70 50 3500
80 40 3200
90 30 2700
100 20 2000
110 10 1100
120 0 0

15. Consider again the choices facing Henry and Dave.
After prolonged negotiation, the two suppliers of
water agree to keep production at 30 gallons so
that the price will be kept higher and together they
will earn the maximum profit. After they agree on
production level, however each of them must decide
whether to cooperate and live up to this agreement
or to ignore it and produce at a higher level. Below
figure shows how the profits of the two producers
depend on the strategies they choose.

17. I could keep production low at 30 gallons as we agreed, or I
could raise his production and sell 40 gallons. If Dave up to
the agreement and keeps her production at 30 gallons, then
he earns profit of $2,000 with high production and $ 1,800
with low production. In this case he will better off with high
production. If Dave falls to live up to the agreement and
produces 40 gallons, then he earn $1,600 with high
production and $1,500 with low production. Once again, he
is better off with high production. So regardless of what
Dave choose to do, he is better off reneging on our
agreement and producing at a high level. Producing 40
gallons is a dominant strategy of Henry. Dave reasons in

19. That’s All Folks …
Thank You .