Game Theory and Economic Modelling

Game Theory and Economic Modelling

Game Theory and Economic Modelling

Game Theory and Economic Modelling

Synopsis

Over the past two decades, academic economics has undergone a mild revolution in methodology. The language, concepts and techniques of noncooperative game theory have become central to the discipline. This book provides the reader with some basic concepts from noncooperative theory, and then goes on to explore the strengths, weaknesses, and future of the theory as a tool of economic modelling and analysis. The central theses are that noncooperative game theory has been a remarkably popular toolin economics over the past decade because it allows analysts to capture essential features of dynamic competition and competition where some parties have proprietary information. The theory is weakest in providing a sense of when it - and equilibrium analysis in particular - can be applied and whatto do when equilibrium analysis is inappropriate. Many of these weaknesses can be addressed by the consideration of individuals who are boundedly rational and learn imperfectly from the past. Written in a non-technical style and working by analogy, the book, first given as part of the Clarendon Lectures in Economics, is readily accessible to a broad audience and will be of interest to economists and students alike. Knowledge of game theory is not required as the concepts are developedas the book progresses.

Excerpt

Over the past decade or two, academic economics has undergone a mild revolution in methodology, viz. the language, concepts, and techniques of non-cooperative game theory have become central to the discipline. Thirty-five years ago or so, game theory seemed to hold enormous promise in economics. But that promise seemingly went unfulfilled; twenty years ago, one might perhaps have found 'game theory' in the index of textbooks in industrial organization, but the pages referenced would usually be fairly dismissive of what might be learned from game theory. and one heard nothing of the subject from macro-economists, labour economists . . . , the list goes on seemingly without end. Nowadays one cannot find a field of economics (or of disciplines related to economics, such as finance, accounting, marketing, political science) in which understanding the concept of a Nash equilibrium is not nearly essential to the consumption of the recent literature. I am myself something of a game theorist, and it is easy to overrate the importance of one's own subfield to the overall discipline, but still I feel comfortable asserting that the basic notions of non-cooperative game theory have become a staple in the diet of students of economics.

The obvious question to ask is, Why has this happened? What has game theory brought to the economists' table, that has made it such a popular tool of analysis? Nearly as obvious is, What are the deficiencies in this methodology? Methodological fads in economics are not completely unknown, and anything approaching rational expectations would lead a disinterested observer to assume that the methods of game theory have been pushed by enthusiasts (and especially those who are

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