Dangerous Guesswork In Economic Policy by Max Steuer

Author:Max Steuer [Steuer, Max]
Language: eng
Format: epub
Published: 2024-07-18T10:29:57+00:00

5 The Scope and Methods of Economics 49

There is no iron rule about what we should assume about the nature of competition in markets, whether these are markets for currencies, services, or anything else. Assuming perfect competition may do little harm in one investigation. Another exercise may have the goal of finding out the prevailing mode of competition.

13

Strategic Behaviour

More recent developments called game theory have had a huge impact on economists’ notions of competition and other aspects of economic life, such as what is rational behaviour? Incidentally, I would argue that game theory is not a good name for this branch of mathematics. The initiators thought this development might have something useful to say about poker, for example.

So far it has turned out that is not the case. Game theory has turned out to be very useful in the analysis of situations where a small number of competitors, typically two, face each other, be it firms in competition, or butterflies seeking mates.

Incidentally, game theory, and several other branches of economic theory, have more straightforward success in explaining animal behaviour than with economic matters. I put this down to animals, and insects, having less complicated goals and being less inclined to change the way they behave.

A game theory analysis starts out by identifying the participants. Who are the players in this encounter? Next comes the choices open to all participants, and the consequences for them depending on what action they take and the other participants take. In most situations participants do not know what action competitors will take. In some situation a potential entrepreneur faces an array of competitors. He might open a pizza joint or a burger joint. The more burger outlets the better the returns to pizza places, and vice versa.

Equilibrium occurs when the returns to both are equal at some mix of the two fast food outlets.

Consider pigeons competing for food. They can act aggressively by challenging other pigeons, or act passively waiting for non-challenging opportunities. If most pigeons are aggressive, the payoff to the passive strategy is higher, as costly fights are avoided. If most pigeons are passive, an aggressive strategy will yield more food, with few fights. An equilibrium occurs where the proportions of aggressive and passive participants are such that the payoffs to both strategies are equal. Numerous applications of strategic analysis have proved useful in economics and other settings.

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