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The classic prisoner's dilemma is as follows: Two people are arrested for committing a crime. The police do not have enough evidence to convict. The prisoners are kept separated, and given two options. If they confess and implicate the other person, then they will receive a reduced sentence. If they do not confess, but the other prisoner implicates them, then they will receive the full sentence.
The result is if they both remain silent, they go free or get a very reduced sentence. If A confesses and implicates B, then A goes free and B gets the full sentence. If B confesses and implicates A, B goes free and A gets the full sentence. Finally, if they both confess they get a reduced sentence.
It is clear that the best outcome is for the two to cooperate by not confessing, yet this is hard to do without being able to coordinate. The defector (the one to confess) has a lot to gain by defecting.
In a business sense: suppose there are two retailers in a town. It is illegal for the two to cooperate on prices; they must act or react without prior knowledge of their competitor.
It is clearly best for both retailers to sell at full price, as this maximizes profit. However, if one retailer reduces prices, they will gain market share and eventually push the other retailer out. The worst case (for the businesses -- great for consumers) is for both retailers to reduce prices, maintaining market share with reduced profits.
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