Traveler's Dilemma  Explained
What is the Traveler's Dilemma?
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What is the Traveler's Dilemma?
In game theory, the travelers dilemma is a nonzerosum game (a game where ones gain doesn't lead to another's loss like a winwin situation or a lossloss 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
 XEfficiency
 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
 ShortRun Decisions Based Upon Costs in a Perfectly Competitive Market
 Marginal Costs and the Supply Curve for a Perfectively Competitive Firm
 LongRun Average Supply (LRAS)
 Decisions to Enter or Exit a Market in the Long Run
 LongRun 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
 HerfindahlHirschman Index
 Concentration Ratio
 Other Approaches to Measuring Monopoly Power in an Industry
 Restrictive Practices under Antitrust Law
 Natural Monopoly
 CostPlus Regulation
 Price Cap Regulation
 Regulatory Capture