Letter: A new paradox?

Click to follow
Sir: Gilbert Adair asks whether he has discovered a new paradox. His version is nice, but the paradox is well known to economists as a variant of the Prisoners' Dilemma.

Simplifying Adair's story, imagine two decorators competing for a contract to decorate a businessman's office. They can each make one of two prespecified bids. If the bids are different, the businessman accepts whichever is lower. If they are the same, he takes his business elsewhere. Logic tells a decorator that he will always end up with nothing if he bids high, whatever his rival may bid, but he might get something if he bids low and his opponent stupidly bids high. If both decorators are clever, they will therefore both bid low and so both end up with nothing.

The more realistic case in which the businessman tosses a coin to decide who wins when the bids are equal, logic still requires that both decorators bid low. The story then has something important to say about the real world, namely: competition is good for consumers.

Comments