Prisoners dilemma
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What is a prisoners dilemma?
In fact the prisoners dillema is a situation which occurs often in reality In this case the basic assumption is that each team in this case, this game (as in reality?) prefers better results to bad results and rather tries to maximize it's own profits. Mostly companies, find it hard to make costs in order to ameliorate the situation in the total of the market. So a company is likely to strive for it's own results and make its own hotel more profitable. But, as the market is limited, this means that you take away customers (and so revenues) from your fellow-competitors, which is bad news for them.
Promotion example
Let's have a look at this dilemma in a fictitious situation
If in any city and market for instance your hotel spend on promotion on a specific market as follows:
- Hotel 1 spends € 50.000 and has a good plan
- Hotel 2 spends € 100.000 and has a good plan
- Hotel 3 spends € 50.000 and has a good plan
- Hotel 4 spends nothing
- Hotel 5 spends € 100.001 and has a good plan
There is a lot of things influencing the decision of the customers, but let's just accept for a moment that the choice of customers for a hotel depends only on this promotion spendings. The customers who are receptive to promotion will choose hotel 5 which has the highest spendings on promotion. It is just one euro more then hotel 1 but still this one euro is very important and might bring a few more extra occupied rooms.
The spendings of the other hotels will bring results as well, but relatively less per euro.
Chat
But what if they would have had a chat, just before the made their decisions and decided to lower their spendings dramatically but keep the relative differences in tact. So
- Hotel 1 spends € 500 and has a good plan
- Hotel 2 spends € 1.000 and has a good plan
- Hotel 3 spends € 500 and has a good plan
- Hotel 4 spends nothing
- Hotel 5 spends € 1.001 and has a good plan
The results would be practically the same, but all of the teams would have saved a lot of money! One big problem: this is legally not allowed, as it limits the working of the free market, of the competition.
The most well-known example always used in explaining the situation is two suspects who are arrested by the police and separated from each other on interrogation. The police have insufficient evidence for a conviction, and visit each of them to offer the same deal:
- betray your mate and if he keeps quiet you go off free and he gets 10 years
- if both remain silent they only get six months each
- if both betray the other, each receives a five-year sentence.
The problem
There is a number of problems though.
- By law a few of these (price) agreements are not accepted
- The dilemma is, of course, that if one team changes it's spendings on promotion in spite of the agreement and spends € 2.000 the results could be spectacular.
- Consumers are not crazy. So if you try to organize prices you will run into price elasticity and even a strike of buyers. Trying to get a branch rising their consumer prices all by the same amount is one of the most well-known manner to try to cooperate and have all teams/hotels benefit.
Very tricky by law, by reaction of the customers and because of the prisoners dilemma: one team does not raise the prices and will attract a lot of price-sensitive customers.
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