Game Theory: Iterated Prisoner's Dilemma

What is the Prisoner's Dilemma?

Two players simultaneously choose between cooperating (C) and defecting (D). The outcome depends on both players' choices. In the iterated version, players meet repeatedly and can react to the opponent's previous moves.

Default payoffs (can be changed under "Tournament"):

• Both cooperate (C, C): 3 points each (R – reward)
• Both defect (D, D): 1 point each (P – punishment)
• One defects, one cooperates (D, C): The defector gets 5 (T – temptation), the cooperator gets 0 (S – sucker's payoff)

The condition for a true dilemma: T > R > P > S and 2R > T + S.

Why is the Iterated Prisoner's Dilemma interesting?

In a one-shot game, defecting is rational – no matter what the opponent does, you benefit from defecting. But most real-world relationships are repeated: we meet the same customers, suppliers, colleagues and competitors over and over again. That changes the logic. Suddenly cooperation pays off, because today's betrayal will be punished tomorrow. This mechanism is why the game is one of the most widely used models in economics, biology, psychology and political science.

Business strategy

• Price wars and tacit collusion: Two competitors who both keep prices high (C, C) earn more than if both undercut each other (D, D). Undercutting the rival (D vs. C) gives a short-term win – but often triggers a price war that hurts both.
• Supplier relationships: Delivering lower quality than agreed yields a one-time gain, but a long-term partner notices and switches suppliers. Repeated play creates incentives for honesty.
• Negotiation and contract compliance: Companies honor contracts even when breaking them would be profitable, because reputation and future business are worth more than short-term gains.
• Alliances and joint ventures: Both parties have incentives to withhold information or expertise. Trust is built gradually through repeated cooperative behavior.

Other real-world examples

• International politics: Trade agreements, climate accords and arms reduction are classic iterated dilemmas – every country is tempted to cheat, but long-term cooperation creates greater prosperity.
• Evolutionary biology: Robert Axelrod's tournaments (1980s) showed that Tit for Tat – cooperate first, then copy the opponent – often wins. This explains how cooperation can evolve even between selfish individuals or animals.
• Social norms and trust: Keeping promises, repaying loans and treating others fairly is individually "irrational" in isolated situations but optimal in a society where we meet each other repeatedly.
• Online platforms: Review systems (eBay, Airbnb) turn single interactions into "repeated" ones by attaching reputation – converting one-shot dilemmas into cooperative games.

The key takeaway: cooperation often pays – but only if the other party is also playing repeatedly and can punish defection. The Strategies tab covers different ways of navigating that balance.