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

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

Man and the Economy, 2020, vol. 7, issue 1, 16

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.

Keywords: The theory of games; prisoners’ dilemma; transaction cost; virtual economy; ad hoc theory (search for similar items in EconPapers)
JEL-codes: C71 C72 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1515/me-2020-0006

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