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Transaction Cost and the Theory of Games: The “Prisoners’ Dilemma” as an Example

Author

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  • Junhui Li

    (Foshan University, College of Economics and Management and Law, Foshan, PR China)

Abstract

Since mathematician John von Neumann and economist Oskar Morgenstern introduced the theory of games as a branch of modern mathematics into Economics, it has become rather prevalent, and it is even thought to be able to rewrite the whole microeconomics, that is to say, replace the frame of economic theory found by Marshall in “Principles of Economics”. But this paper will show that there are two frauds in the “Prisoners’ Dilemma”, one of the classical models in the theory of games. One is the missing calculation of costs of “cooperative solution”, the other is invalidity of “cooperative solution” when adopted to explain the phenomenon in economy or business field, because of misleading by the wrong definition of Monopoly. Oligarchs cannot increase the monophonic degree, even if they cooperate or collide to decrease the productions. But the fundamental problem of the prisoners’ dilemma lies in ad hoc theory. There are transaction costs in cooperation, which is the key constraint. Some special ways (such as repeated game) to decrease transaction costs in special cases are not key factors. This problem exists in all models of the theory of games, so it is its Achilles’ heel.

Suggested Citation

  • Junhui Li, 2020. "Transaction Cost and the Theory of Games: The “Prisoners’ Dilemma” as an Example," Man and the Economy, De Gruyter, vol. 7(1), pages 1-16, June.
  • Handle: RePEc:bpj:maneco:v:7:y:2020:i:1:p:16:n:4
    DOI: 10.1515/me-2020-0006
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    References listed on IDEAS

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    1. Hirshleifer,Jack & Glazer,Amihai & Hirshleifer,David, 2005. "Price Theory and Applications," Cambridge Books, Cambridge University Press, number 9780521523424, September.
    2. Duarte Brito & Pedro Pereira, 2010. "Access to Bottleneck Inputs under Oligopoly: A Prisoners’ Dilemma?," Southern Economic Journal, John Wiley & Sons, vol. 76(3), pages 660-677, January.
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    More about this item

    Keywords

    The theory of games; prisoners’ dilemma; transaction cost; virtual economy; ad hoc theory;
    All these keywords.

    JEL classification:

    • C71 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Cooperative Games
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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