Imagine that you're on vacation in Russia, when suddenly you're arrested and accused of spying for the US. (You're innocent, of course). Your captors inform you that if you confess, you'll receive a prison sentence of two years, while your co-conspirator (whom you've never heard of) will receive a prison sentence of twenty years. If you both confess, you'll each receive a prison sentence of five years. You're also told that your co-conspirator is being offered the same option. If you both maintain your innocence, however, there's not enough evidence to convict either of you. Applying economic theories to the problem, what should you choose to do, and why?
This is the classic prisoners' dilemma, which explains why cooperation is difficult even when it is beneficial for both parties. Simply stated, you cannot make the best decision without more information. The best outcome is for both prisoners to remain silent. However, the risk the other might confess and turn state witness is ...
Choosing a course of action when you don't know what your co-conspirator will do when offered the same deal. How this situation relates to oligopolies?