Is It Better to Outsource or Insource T-shirts?

The Prisoners’ Dilemma: Outsourcing Factory Safety

by Elaine Schwartz    •    May 18, 2013    •    679 Views

Why do H&M and Gap disagree?

While European retailers like H&M (biggest Bangladesh garment buyer), Benetton, Marks & Spencer and Carrefour will act to together to elevate Bangladesh factory safety standards, US firms like Gap, Wal-Mart, J.C. Penney and Target are each acting alone. Why?

Sounds like retailers are facing the prisoners’ dilemma. 

Picture for a moment 2 (guilty) suspects. Questioned by the police, each one can confess or remain silent. When one confesses and the other does not, the talker gets a less severe sentence. If both are silent, then they are released; if both confess, then they get equal jail time.

And therein lies the dilemma. Do you base your decision on what you think the other individual will do? The problem is that each one’s fate depends on what the other prisoner does. And, neither knows the other’s strategy.

An example of economic game theory, the prisoners’ dilemma involves strategizing against a second party that has the power to affect the consequences of your decisions. Whether looking at disarmament negotiations, Democrats and Republicans, or H&M and Gap, the basic strategic patterns are similar. John Nash won a Nobel Prize for his research about Game Theory.

So yes, retailers have compelling ethical incentives to elevate safety standards in Bangladesh. However, because an ethical strategy coincides with profit considerations, each one’s decision is all about competition and the prisoners’ dilemma.

Sources and Resources: This Washington Post article provides good background on how retailers disagree about elevating factory safety and here is the  6 page agreement that most US firms are not signing. For more on the prisoners’ dilemma at econlife, you might enjoy posts on OPEC, Congress, Ivy League schools and World Cup soccer. Please note that this post includes some excerpts from previous posts on the prisoners’ dilemma.

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