The Prisoner’s Dilemma & eBay

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In Howard Rheingold’s video, Introduction to Cooperation Theory, he discusses three different social dilemmas (or mythic narratives). The first described is the prisoner’s dilemma.

What is the Prisoner’s Dilemma?

The prisoner’s dilemma is a situation where two criminals are arrested and imprisoned for a crime. The individuals are jailed separately and cannot communicate. Each prisoner is given the same deal. One prisoner can confess and be set free, but the other prisoner if remains silent will receive a longer sentence (and vice versa). They can both remain silent and both serve a shorter sentence. If they both confess they will both serve a medium length sentence. The dilemma for each prisoner is what to do without knowing what the other prisoner will do.

This dilemma is used to describe a mathematical concept in the area of game theory. “Game theory can be defined as the study of mathematical models of conflict and cooperation between intelligent and rational decision makers” (Myerson, 1991, p.1).  The prisoner’s dilemma is a narrative developed to explain the theory to non-mathematicians. Merrill Flood and Melvin Dresher are attributed as developing the theory as part of their work for the Rand Corporation in 1950.

The prisoner’s dilemma is not only limited to mathematical research. David Gauthier, a philosopher used the prisoner’s dilemma to explain rationality and morality. “Gauthier suggests that people often act morally and overcome the prisoner’s dilemma because they recognize that obeying morals is in their self-interest” (Burke, 2007, p.8).

How does this Relate to eBay?

Rheingold’s video uses ecommerce as a modern application of prisoner’s dilemma. He discusses how a buyer will not pay for an item they have not received, while a seller will not hand over an item for which they have not received payment. Both individuals end up with unsatisfactory results.

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Despite Rheingold’s example, these types of transactions take place all the time through ecommerce. Large retailers such as Amazon conduct business in this manner, as do small businesses and individuals on eBay and Craigslist. According to a CNET article, eBay plans to double its current transactions by 2015. That would amount to $200 million active users on eBay alone.

Why does eBay work?

If you apply the prisoner’s dilemma to ecommerce, these transactions should not be taking place. In the book Understanding Social Networks: Theories, Concepts, and Finding, Kadushin (2012) discusses how “even in the modern era of the internet…there is no substitute for face-to-face interaction, at least to establish the basis for future non-face-to-face interaction and to develop or renew trust (p.126).  Face to face interaction does not occur in eBay transactions. Using PayPal for financial transactions can help ensure the seller receives payment, but what ensures that the merchandise is sent to the purchaser?

Developing Trust

eBay has a system in place which helps buyers and sellers to provide feedback to each other. This information system, known as Feedback creates a public score of each user on eBay. Individuals with positive feedback (buyers and sellers) may appear more trustworthy to other users. This can develop the trust which cannot be developed through face to face interaction. As Kadushin (2012) states, “success breeds success” (p. 116) so increased positive Feedback will promote more transactions for the user.

This also follows Gauthier’s view on human behaviour. Buyers and sellers in ecommerce tend to behave in a rational manner which ultimately is in their self-interest.

References

Burke, M. (2007). The Emergence and Evolution of Social Norms: Rational Cooperation in a Finitely Repeated

Prisoners’ Dilemma.  Wesleyan University. Middletown, Connecticut.

Myerson, R. (1991). Game Theory: Analysis of Conflict, Harvard University Press

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9 thoughts on “The Prisoner’s Dilemma & eBay

  1. eBay is a good example of a peer network because in order to be successful in business transactions, the seller is accountable to the eBay network. If the buyers/network don’t have good experiences, the seller could eventually be forced out of the eBay network. In contrast, buyers are more likely to engage in business with sellers who have high ratings = the leaders.

  2. Carrie – what a great analysis. The internet has changed so many social conventions – many of them relying on trust – it is fascinating to think about why that is. Thanks for a thought-provoking read!

  3. This is still a hybrid model. The institution creates a framework for the businesses (People in some cases, but even quasi-people who run a shop) selling on ebay to build trust around them. Part of that trust then transfers on to being in Ebay and using paypal in the first place. This is where the hyper extensive “Self-organizing” models are a fallacy. Someone or something has to build a framework that is and can be scalable BEFORE the self-organizing groups can then act “independently” for the good of one another and exchange value.

    Reingold says the institution moves opposite to the self-orgnizing networks, but in this case and many cases, the institution actually amplifies it by strict and highly optimized processes on the site that our user friendly and search friendly so people can find and buy quickly and easily. Yes, there may be exceptions such as Wikipedia, but they are few and far between, and are simply knowledge databases rather than transactional and useful to commerce, products or things that can make people genually happy. NOW, I wouldn’t mind seeing all that go away for a while to see the cost of knowledge vanishing. I think that’d be a cool expirament to see what else is out there and what pieces are missing in the transfer of truly free networks of knowledge that are not profit driven.

    I think there’s a space to be filled at Public Institutions to fill the void both in what is and isn’t there for knowledge. But I’ll save that for another time.

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