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IAI Actuarial Core Principles · Business Management · Decision-making process, attitude to risk and competition

Two Indian private life insurers, Alpha Life and Beta Life, each choose independently between 'high commission' and 'low commission' for agents. Whatever Beta does, Alpha earns more by choosing high commission, and the same holds for Beta. Both end up choosing high commission and each earns less than if both had chosen low. Which game-theory concept best describes this situation?

This is a prisoner's dilemma. Each insurer has a dominant strategy, high commission, whatever the rival does, yet when both choose it they are each worse off than if both had chosen low commission. Individual rationality produces a collectively poorer outcome.

  1. APrisoner's dilemma with a dominant strategy for each firmCorrect
  2. BZero-sum game with a mixed-strategy equilibrium
  3. CCooperative game with binding side payments
  4. DSequential game with a first-mover advantage
  5. Coordination game with two equally good equilibria

Explanation

Each firm has a dominant strategy (high commission) regardless of the rival's choice. The resulting equilibrium leaves both worse off than mutual low commission, which is the defining feature of a prisoner's dilemma. It is not zero-sum because total payoffs change with the outcome.

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