Thinking Strategically: The Competitive Edge in Business, Politics, and Everyday Life

Sometimes players suddenly decide to cooperate, and sometimes that cooperation breaks down. Game theory suggests ways to predict when these changes will happen.

During the 1970s and 1980s, a group of oil-producing nations created a cartel, OPEC, that reduced overall production and raised oil prices. The cartel began to break down, though, when some countries broke faith and began over-producing in an example of the prisoner’s dilemma.

Each member that breaks such agreements increases its payout relative to the others but reduces the total payout to all. Cooperation would have given all of them more money, but the temptation to break away and make more becomes the dominant strategy. If everyone else is thinking of breaking the agreement, then each member needs to break away. When cooperation fails, everyone is worse off.

In politics, whichever person or group proposes to the public a necessary but painful solution to a major problem—a tax increase to pay for needed government spending, for example—that person or group pays a steep price in the next election, while everyone else benefits. The best strategy is to say nothing, but if all sides do so, the problem gets worse.