What is the Traveler's Dilemma?

In game theory, the travelers dilemma is a non-zero-sum game (a game where ones gain doesn't lead to another's loss like a win-win situation or a loss-loss situation) in which the participants are looking to maximize gains without regard for each other. This game displays the research that making irrational choices often produces a better result in game theory, and is termed the paradox of rationality.

How does the Traveler's Dilemma Occur?

Travelers Dilemma was formed in 1994 by game theorist Kaushik Basu, where he illustrated this concept using an example of two airline passengers. For conciseness, let us assume that two travelers Peter and Paul, after returning from a journey in Caribou found out that one of their antiques got ruined. In this case, Peters antique is similar to that of Pauls, and both are of the same quality and price. Now the airline manager is willing to compensate them for their loss, but has no idea about the actual price of these antiques. The airline manager, being a smart individual knows that if he asks both of them to come up with a price, theyll inflate it, and so he decides to use another means. He simply asks both fellows to come up with a price between $2 and $100 without consulting each other. He makes it known that the person with the lowest price gets a $2 bonus, while the one with a higher price gets a $2 penalty for being dishonest. However, if the prices are the same, each participant wont incur a bonus or a penalty, and the agreed sum will be released to both of them. Mathematically, if Peter comes up with $68 and Paul comes up with $62, then the manager will take $62 as the actual amount, and pay both participants this amount. However, Peter will have to go home with $60, and Paul with $64 (penalty and bonus). According to Travelers dilemma, the rational choice is $2, which is also the Nash Equilibrium. $2 is the rational choice, because Peter, at first, will come up with $100, and this would work only if Paul is as greedy as he is. However, Peter knows that there is a chance that Paul might write $99 to get $101 (plus $2 bonus), so he goes on to write $98, thus spiraling all the way down to $2, which is the least they can go. At $2, each participant has nothing to lose, thus it is called the Nash Equilibrium.

Related Topics

• Market Structure
• Perfect Competition
• Bidding War
• Complements & Substitutes
• Substitution Effect
• Imperfect Competition
• Market Power
• Price Takers
• Price Makers 
• Perfect Competition and Decision Making
• X-Efficiency
• Captive Market
• Contestable Market Theory
• Highest Profit Point in a Perfectly Competitive Market
• Marginal Revenue
• Using Marginal Revenue and Marginal Costs to Maximize Profit
• Marginal Revenue Curve
• Profit Margin and Average Total Cost
• Break Even Point - Cost Curve
• Shutdown Point - Cost Curve
• Short-Run Decisions Based Upon Costs in a Perfectly Competitive Market
• Marginal Costs and the Supply Curve for a Perfectively Competitive Firm
• Long-Run Average Supply (LRAS)
• Decisions to Enter or Exit a Market in the Long Run
• Long-Run Equilibrium in a Perfectly Competitive Market
• Constant, Increasing, and Decreasing Cost Industries
• Productive and Allocative Efficiency in Perfectly Competitive Markets
• Market Efficiency
• Market Inefficiency
• Pareto Efficiency
• Market Failure 
• Search Theory
• Monopoly
• Natural Monopoly
• Legal Monopoly
• Bilateral Monopoly
• Promoting Innovation through Intellectual Property
• Predatory Pricing
• How Monopolists Set Price with the Demand Curve
• Total Cost and Total Revenue for a Monopolist
• Marginal Revenue and Marginal Cost for a Monopolist
• Inefficiency of Monopoly
• Perfectly Competitive Market
• Monopolistic Competition
• Duopoly
• Oligopoly
• Differentiated Products
• Perceived Demand for a Monopolistic Competitor
• Monopolistic Competitors Choose Price and Quantity
• Monopolistic Competitors and Entry
• Monopolistic Competition and Efficiency
• Cartel (Economics)
• Game Theory
• Traveler's Dilemma
• Prisoner's Dilemma
• Iterated Prisoner's Dilemma
• Nash Equilibrium
• Diner's Dilemma
• Trembling Hand Perfect Equilibrium
• Gambler's Fallacy
• Arrows Impossibility Theorem
• Backward Induction
• Tournament Theory
• Oligopoly and the Prisoner’s Dilemma
• Forcing Cooperation in a Prisoner’s Dilemma
• Cooperation and the Kinked Demand Curve
• Corporate Merger or Acquisition
• Antitrust Laws
• Herfindahl-Hirschman Index
• Concentration Ratio
• Other Approaches to Measuring Monopoly Power in an Industry
• Restrictive Practices under Antitrust Law
• Natural Monopoly
• Cost-Plus Regulation
• Price Cap Regulation
• Regulatory Capture