What are coordination problems?
Coordination problems are the root cause of a lot of issues in society. Imagine each actor is a player in a game, and must choose a strategy based on the information available to them. Coordination problems are basically ‘games’ with multiple outcomes, so they have to decide how to act.
The prisoner’s dilemma
One example of this kind of problem is the prisoner's dilemma. Imagine you and an accomplice are arrested for murder. You are questioned at the same time, but in separate rooms, and you are not given a chance to talk to your friend before the interrogation. The twist is, there isn’t enough evidence for a murder conviction so the police want to sentence you both for robbery, or try to get one of you to testify against the other for murder. The policemen offer you both the exact same deal: you can i) stay silent or ii) screw over your friend and say he’s guilty of murder. If you both say stay silent then you both go to prison for just 1 year - we’ll call this option ‘cooperating’. If you both betray each other then you both get 5 years behind bars - we’ll call this ‘defecting’. If you stay silent and your friend betrays you then he gets off scot-free while you’re sentenced to life imprisonment, and vice versa.
If we want to have the best ‘overall outcome’, and we are certain that the other will also stay silent, then you might think that perhaps we would hypothetically cooperate and both serve 1 year. But if I’m certain that you will stay silent then I should logically decide to betray you and receive no punishment at all. If I did decide to stay silent, I would be exposed to the risk that you might rat me out, and I might have to spend my life in prison. So, the logical choice is for us both to defect - the options then would be i) I walk free or ii) I serve 5 years in prison.
When will the games end?
And we also often play an ‘iterated’ coordination games in society, where we play the same game over, which changes the benefits to you (payoffs) to be more rational to cooperate than defect (if you don’t know how many times you’ll interact with this person again).
Examples of coordination problems
Cooperative behavior of many animals can also be understood as an example of the prisoner's dilemma. Often animals engage in long term partnerships, which can be more specifically modeled as iterated prisoner's dilemma. For example, reciprocal food exchange (you feed me today and I’ll feed you tomorrow… or will I…?)
Examples of the prisoner’s dilemma include: countries individually benefitting economically from not limiting their carbon emissions, to everyone’s detriment; athletes using performance enhancing drugs to be more individually competitive, when all athletes would be worse off if everyone did it; etc.
Advertising is also cited as a real-example of the prisoner’s dilemma. When cigarette advertising was legal in the United States, competing cigarette manufacturers had to decide how much money to spend on advertising. Advertising doesn’t increase the number of smokers by as much as it does take customers from other manufacturers. In this sense, advertising is not cooperating, because if the firm wants to keep their customers, they’ll have to spend more on advertising as well, leading to a downward spiral. When cigarette advertisements were banned, profits actually increased (as explained in this video).
Monopolies increase prices because the firms involved can cooperate to keep them high. The more a market share is dispersed across different firms (measured by the concentration ratio), the less they can cooperate (i.e. one is more likely to defect and lower prices).