Thoroughly explain the situation: identify the players, the rules, and all the outcomes. You may simplify the example if needed (for instance, if there are n players, you can simply it to just 2 players). Include the payoff matrix, and do your best to put in real values (estimates) as payoffs. Make clear why your application is a Prisoner’s Dilemma: what is the social optimal outcome, and what is the Nash Equilibrium.
Suggest possibilities for (sustained) cooperation. What could be done so that the players’ incentives discourage defecting? Players: Auber and Left Rules: Both companies develop, market, and operate a mobile-app-based transportation network, which allow consumers to submit a trip request to crown-sourced taxi drivers. Although Auber is the current market leader, competitors such as Left are now competing aggressively to get a larger share f the market. Both companies have the choice to maintain or lower their price. Auber currently charges a $2 base fare and $1. 20 per mile.
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On the other hand, Left charges $1. 31 as a base charge and $1. 31 per mile. We are under the assumption that both companies act simultaneously and have no means of negotiating a contractual collusion. Currently, Beer’s net revenue is at $2 billion, while Leafs net revenue is at $300 million. Outcomes: Both companies are aware that: If they decide to increase their prices and the competitor does not, nonusers will flock to the other service provider and $1 00 million of the net revenue of the higher priced mobile app will transfer to the lower priced competitor.
If the competitor increase their prices and their company does not, consumers will flock to the other service provider and $1 00 million of the net revenue of the higher priced mobile app will transfer to the lower priced competitor. If neither increases its prices, the status quo will be maintained. In both increase their prices, both companies will lose $50 million worth of et revenue. Payoff matrix: Left Lower Prices Maintain Prices Auber ($1. 95 billion, $350 million) ($2. Billion, $200 million) ($1. 9 billion, $400 million) ($2 billion, $300 million) Why is this a prisoner’s dilemma? The best scenario for either company is that its competitor sticks to its current pricing model while they decrease prices in order to have an edge. Both companies are tempted to cut prices to take away market share from its competitor. However, if they both cut prices, both end up losing revenue. If hey both maintain their prices or “cooperate”, they maintain the status quo.