Question
Two competing lemonade stands, Stand A and Stand B, are deciding whether to set a high price or a low price for lemonade.
If both choose high price, they each earn $50.
If both choose low price, they each earn $30.
If one chooses low price while the other chooses high price, the low-price stand earns $70 and the high-price stand earns $10.
What strategy will each stand most likely choose, and why?
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Answer
This is an example of the Prisoners Dilemma in game theory.
Payoff Table
Stand B: HighStand B: Low
Stand A: High50, 5010, 70
Stand A: Low70, 1030, 30
Reasoning
If Stand B chooses high, Stand A earns more by choosing low (70 instead of 50).
If Stand B chooses low, Stand A still does better choosing low (30 instead of 10).
So, choosing low price is the dominant strategy for Stand A.
The same logic applies to Stand B.
Final Outcome
Both stands will most likely choose low price, earning $30 each, even though both would earn more ($50 each) if they both kept prices high.
This shows how individual self-interest can lead to a worse outcome for everyone.
