For those who don't know what it is, it's a thought experiment where two people are being questioned for a crime that they committed together, but without a confession there's not enough evidence to arrest or convict on a major charge. One person confessing and betraying means the betrayer get's away, and the person who remained silent get's a 1 year prison sentence. If both confess, they both get a three month prison sentence. If neither confesses, they both get a light 1 month sentence. As a result of this, both people confess (trying to get off completely), and thus both getting a three month sentence. Whereas if both kept silent, they would've have received a lighter sentencing.
This is mostly a true phenomenon. I had a teacher perform it once in class - just after going over the dilemma - and it still proved to be rather true. You don't trust your other partner, they don't trust you, you both rat each other out. This plays into politics, economics, etc. In economics, this is important because it shows how the market and competitors can become stagnate. In regards to "green" technology and the green movement in general, for example, companies may want to invest long-term in their energy needs, pollute less, etc, but they see the short-term capital needed to do this as a hindrance to their competitiveness. However, if the companies had an open dialogue with each other, and came to terms on regulations, etc, then companies can overcome this communication gap, and all take the bullet together, at the same time. In this way, no one companies competitiveness is directly hampered, and the companies are able to make the improvements they want to make. It's the prisoner's dilemma, where a lack of communication leads to a logically worse result. The competitive nature of the market can actually hamper innovation from happening, in certain cases.
Or so that's how I see it. Where does the analogy break down for other people? Is the dilemma itself somehow flawed? IS the comparison to the market and over-reach? Hopefully I explained it all right, it's late and I'm tired.