The Prisoner’s Dilemma is Confounding the Housing Market
This article describes how the prisoner’s dilemma plays out in the current housing market in terms of the decisions made by homeowners about whether or not to sell their houses. It explores how the prisoner’s dilemma is a reason more homeowners are not opting to sell their houses. One thing that makes the housing market distinct is that individuals are both buyers and sellers since when someone sells a house it is typically because they want to buy a new one.
For example, consider the following payoff matrix. In this situation, both homeowners want to sell their house and upgrade to buy a new one. However, if one sells and the other one doesn’t, then there is a housing shortage because whoever sells must attempt to buy a house in a market with a housing shortage. Since demand is greater than supply in this market, prices escalate and the one who sells is worse off than the one who doesn’t sell. Thus, we end up in the bottom right quadrant with both owners opting not to sell. The article refers to this phenomenon as an “inventory impasse.”
This example relates to our discussion of game theory in class. Like the prisoners in the example we discussed in class, the two hypothetical homeowners are not able to arrive at the situation that would be the most optimal for both of them (which would be for both of them to sell) because they are not able to communicate with each other. As the article states, “If everyone sells there will be plenty of supply, but the risk of selling when others don’t produces the noncooperative outcome — everyone choosing not to sell.” In this case, neither player has a dominant strategy, but (sell, sell) and (don’t sell, don’t sell) are both pure Nash equilibria. A mixed Nash equilibria strategy involves both owners choosing to sell ½ of the time.