Prisoner’s Dilemma in the Business World (Coca-Cola vs. Pepsi)
In this article by Elvis Picardo, he discusses the Prisoner’s Dilemma in terms of big corporations in our world. One prominent example he uses is the battle between Coca-Cola and Pepsi. In the business world, big companies are always in a battle to attract the most customers and produce the highest revenue. The obvious solution would be to have the lowest price that attracts the most customers. Or is it?
The Prisoner’s Dilemma is when two players acting in their best interest do not create the best outcome. In this example, the options for the two players (Coca-Cola and Pepsi) are to keep their soda prices high or drop the price of their soda.
In this case, if both players kept their prices high, they would see the continuation of normal growth, and their profit would increase by $500 million dollars. However, if Coca-Cola decides to drop its price and Pepsi keeps its high price, the profit for Coca-Cola increases to $750 million dollars due to a greater market share with the lowered price that attracts more customers. On the other hand, if both Coca-Cola and Pepsi decide to decrease their prices, both companies see a profit increase of $250 million. If one company decreases its price, the other company will follow the strategy in order to retain its market share. Therefore if this occurs, it will result in a lower profit of $250 million each, much lower in comparison to when both companies keep their original price where they make a $500 million profit.
As seen in this example, the company that lowers its price may see a benefit with the much higher profit but when the other company follows this strategy, both companies are left with lower profits than their starting profit. The initial best strategy for a corporation may be to drop the prices, but in the business world, the cascade effect will put both companies at a disadvantage with lower profits.
This may explain why there are no sudden drops in big corporations as it would result in a lower profit overall. If one company could capture all the market share with lower prices, the sudden drop in prices would be a common pattern in the business world. However, prices increase or decrease collectively and at a steady rate, perhaps explained by the Prisoner’s Dilemma with the Coca-Cola and Pepsi example. Although the drop in prices may increase the company’s profit for a while, other companies will soon follow and all companies will be left with a lower profit overall. Due to the fact that other corporations can copy strategies and follow what’s best in the marketplace, lowering profits will be advantageous for only a short period of time until everyone’s prices are low. These low prices may be beneficial to the customers, but all the companies in the market will eventually be at a loss. In the business world, the best solution may be to avoid risks and keep their current prices.
Sources: https://www.investopedia.com/articles/investing/110513/utilizing-prisoners-dilemma-business-and-economy.asp#:~:text=The%20U.S.%20debt%20deadlock%20between,parties%20in%20the%20next%20election.