Markets, Games, and Competition
- The majority of economic transactions take place through markets. Markets have a myriad of different structures. They are central in organizing production and allocating surpluses between participants. On some occasions, market participants cannot affect the outcome.
- However, on other occasions, market participants can follow complicated strategies to affect production allocation in their favor.
- What kind of strategies do market participants employ?
- How do the strategies of different participants interact?
- Do their strategies affect market efficiency besides allocation?
- In most real-life situations, economic agents do not operate in isolation. Their gains and losses depend not only on their own choices but also on the choices of others.
- Markets are typical examples of economic situations where social interactions matter.
- How can we study social interactions in economics?
- How do economic agents compete and coordinate with each other?
- What are the social dilemmas that arise in such situations?
- Many real markets are neither perfectly competitive nor monopolies. Instead, they are oligopolies comprised of a small number of firms that have large enough market shares and can influence prices.
- Nonetheless, firms’ profits do not exclusively depend on their own choices. Their small numbers allow them to utilize a variety of competition strategies.
- How do firms strategically interact?
- What means do they use to compete?
- How do the welfare outcomes of oligopolies compare to those of monopolies and perfect competition?
- Strategic interactions and social dilemmas can sometimes be understood in terms of one-shot sandbox cases. In such settings, where time is neglected, promises, threats, and reputation play no role.
- However, players have many additional strategies available whenever there is a future, and they can use promises and threats to achieve very different outcomes compared to the atemporal cases.
- How does time affect the outcomes of social interactions?
- Why is reputation important whenever time is involved?
- How can players incorporate time into their strategies?
- Competition in real markets is not a static phenomenon. Firms can change their choices from date to date and adapt their strategies based on past events and the reactions of competitive firms.
- In such fluid settings, some firms take the initiative and set the pace of competition in the market. Other firms follow.
- Do firms benefit from assuming a market leader role?
- How does the sequence of moves affect the market power?
- Why does market entry influence the behavior of incumbent firms?
Collusion and Market Power
- Markets with intense competition tend to reduce the competing firms’ market power. Firms could form cartels to control the market and extract a greater share of the economic surplus if left unregulated. For this reason, collusion and cartel formation are illegal practices in most market economies today.
- However, legally binding contracts are not necessary for firms to coordinate. Firms can use dynamic strategies to collude tacitly.
- What kind of strategies can lead to tacit collusion?
- What is the role of the means of competition in tacit collusion?
- How can competition authorities measure market power?
Games with Uncertainty
- The role of information is central in strategic interactions. Observing other players’ actions before choosing leads to fundamentally different interactions and outcomes. Unobserved actions are not the only pieces of information relevant when players interact.
- In many social interactions, players are not fully aware of the state of nature of the game. They are unaware of the characteristics of other players with whom they interact.
- How can we analyze interactions under such uncertain conditions?
- How do economic agents interact with one another when information is incomplete?
- Does uncertainty exacerbate or diminish the intensity of social dilemmas?
Competition with Incomplete Information
- Including uncertainty in market models complicates the analysis. However, some results obtained when ignoring it can be less conducive. For instance, the nature of online marketplaces has many characteristics resembling price competition.
- Yet, many firms make profits in such marketplaces, contrary to the model predictions of deterministic competition in prices.
- How can uncertainty affect competition in markets?
- Do the insights and results of competition change when uncertainty is taken into account?
- Does uncertainty have a uniform impact in all markets?