This makes no sense if you've ever interacted with other humans. There are several logical societal deterrents to stealing beside police. (Ostracism, retribution, foresight, modeling…)
A prisoner's dilemma is a wholly fictional and game-theoretic construct involving single, isolated interactions among perfectly rational agents.
None of that has anything to do with humans. Humans never play the prisoner's dilemma because they're never any of the above concepts. Humans are certainly not perfectly rational, and almost always interact with the same set of people. You can't apply such an abstraction to public policy.
When you add police then the utility of everyone goes down, i.e the police may randomly shoot you for doing nothing whatsoever.
In the middle ages ( > 100 years ago) the english tried making the punishments more severe than the crime, e.g hanging or transportation for stealing a loaf, but that didn't result in decrease in crime, even if it made the crimes unprofitable.
If the punishment is random and unfair, as it will be, Then the deterrent effect is negligible because the probability that you will get away with it increases more than the severity of punishment.
Humans mostly avoid crime not because it is unprofitable, but because humans are mostly nice. Adding police to society decreases the probability that they will be nice. SO in most police states police and police penalties on society are heavy yet nobody wants to live in a police state.
tldr: police do not work as a deterrent to crime.