a paradox, since they will both end up serving a longer time in jail than if
they had co-operated. The equilibrium still applies even if the suspects had
agreed to co-operate beforehand; they will still tend to defect once they are
separated and do not know how the other is acting.
The reader may wonder at this stage what the type of situation described
above has to do with business strategy. To illustrate this, let us consider the
situation of Coke and Pepsi. At any given time period each firm has to decide
whether to maintain their existing price or to offer a discount to the retailers
who buy from them. Table 9.2 shows the payoff matrix for this situation, with
the payoffs referring to profits, measured in millions of dollars per month. The
payoffs for Pepsi are shown above the diagonal and the payoffs for Coke are
shown below it. The objective in this situation is to maximize, rather than
minimize, the payoffs.