Until recently, medical doctors and lawyers have been prohibited from engaging in competitive advertising. If the prisoner’s dilemma applies to this situation, then the presence of this restriction would be likely to A. increase profits earned by individuals in these professions. B. reduce profits earned by individuals in these professions. C. have no effect on the profits earned by individuals in these professions. D. increase the profits of some and reduce the profits of other individuals in these professions.
The correct answer and explanation is:
The correct answer is:
A. increase profits earned by individuals in these professions.
Explanation:
The prisoner’s dilemma is a concept from game theory where two individuals acting in their own self-interest do not produce the optimal outcome. In the context of competitive advertising among professionals like doctors and lawyers, each individual would ideally want to advertise to attract more clients and increase their own profits. However, if everyone advertises aggressively, the overall effect could be a price and profit war, reducing profits for all.
Without restrictions (competitive advertising allowed):
- Each professional would feel compelled to advertise to avoid losing clients to competitors.
- This leads to a kind of “arms race” in advertising expenses.
- Advertising costs rise, and competitive pricing may drive down profits.
- Even if everyone advertises, the net gain may be minimal or negative, as profits are spent on advertising and competition is intense.
- This situation reflects the prisoner’s dilemma: each individual’s dominant strategy (advertise) leads to a worse outcome for the group (lower profits overall).
With restrictions (no competitive advertising allowed):
- The “arms race” is prevented.
- Professionals avoid costly advertising wars.
- Competition is less intense, so prices and fees may remain stable or higher.
- Profits for individuals tend to increase since advertising expenses are lower, and competition on price or client acquisition is limited.
This is why prohibiting competitive advertising acts like a collusive agreement (even if implicit) among professionals, increasing profits by reducing competitive pressures. This restriction allows individuals in these professions to avoid the prisoner’s dilemma scenario of mutually harmful competition.
In summary, the presence of a restriction on competitive advertising reduces aggressive competition and advertising costs, thereby increasing the profits earned by individuals in these professions. This corresponds to answer A.