10/17/2005

On the Nobel Prize in Economics going for Game Theory Again

If economics isn't testible, you don't have a science. Having a certain richness is nice, but there are simply too many game theory models that end up making similar predictions. When you can't even differentiate monopoly behavior from perfect competition in predation what good is it? Indeed the goal frequently seems to be how many different models can be generated. I also agree that Game theory creates a bias towards thinking about everything in terms of monopoly. What is interesting in Game Theory disappears when you assume that firms are behaving competitively. For whatever it is worth, I wrote a book on all this entitled: "Are Predatory Commitments Credible?" Take a simple example in Predation to show how sensitive the results are. All the models basically look at the information held by the predatory firm. But what if the victim firm can sell short the stock of the predator? Given that the costs to the predator from actually engaging in predation are so large, indeed much greater than the losses imposed on the victim, victim firms that sell short the stock of the predatory might not only hope that the predator enters the industry but the victim firm might now want to stay in the industry just so that they can benefit from the predator's losses. Of course, the very possibility of short selling can make it unnecessary. The whole thing is a mess.