That having been said, I think the kind of phenomena that game theory helps with are more limited than most of the profession seems to think. Competition reduces the role and importance of strategic behavior and makes game theory less useful.
Focusing on how people strategically outmaneuver someone to gain some advantage, like the competition between pitchers and batters in a baseball game, drives people to think of market competition like they would think of competition in a poker game. But competition between businesses in a market also drives them to cooperate with consumers.
Suppose I hire a plumber to install a new faucet at my home. If he does shoddy work or uses inferior materials, I am likely to find out when I see that puddle in my basement. He may have gotten me that first time, but if I have other plumbers who I could hire, I am unlikely to call him again. This competition keeps the plumber on the straight and narrow the first time around, and he does what I expect him to do much more often than not.
That's the nature of competition: it drives businesses to act in the best interest of their clients. Which brings me to this:
As a telling example of the prominence of this view, the book Freakonomics achieved phenomenal popularity, selling over a million copies. In it, authors Steve Levitt and Stephen Dubner purport to unveil the "obfuscation, complication, and downright deceit" that pervades our everyday life. Naturally, suspicion of corporations is a paramount theme. But the authors' misgivings go much further. They see experts such as doctors, funeral directors, and life insurance agents as unscrupulous sharks looking to cash in on their expertise by swindling their own clients. "If you were to assume that many experts use their information to your detriment, you'd be right,' they warn. The pair even compare real estate agents to members of the Ku Klux Klan. In their world, almost everyone - from teachers so Sumo wrestlers to politicians - is cheating or lying to somebody. Whether it is Levitt and Dubner or Michael Moore, popular authors have found plenty of buyers for the argument that nearly all corporations are committing crimes.
But are free market economies really based on fleecing the consumer? Is the U.S. economy truly a giant, Hobbesian free-for-all that encourages duplicity in our everyday transactions? Is everyone from corporate CEO's to your local car salesman really looking to make a buck at your expense?
Those two paragraphs are from the introduction (page 2 in my copy) to John Lott's recent book Freedomnomics, which Professor Lott, whom I have never met, asked me to review. The book is partly a rebuttal to Levitt and Dubner's Freakonomics. But more than that, it is a book on why markets improve people's lives and how they do so. Certainly there is some underhandedness that occurs in a market economy, and Lott touches on that too. But competitive markets, although the name hides it, are more about cooperation.
Lott describes the societal benefits of supposedly unsavory activities like speculation, price gouging, and conceal-and-carry laws. He describes how over-the-air radio was saved, not by government intervention, but by the realization that there was a market for advertising on the radio. He describes the importance of reputations in disciplining people to cooperate with one another. Lott devotes a whole chapter on criminal activity where he touches on the relationship between criminal activity and various government stipulations such as gun control laws, abortion laws, broken window policies, among others.
There are also the typical types of stories that we economists often talk about: the stories of unintended consequences (such as how affirmative action policies in law enforcement may have led to increased rates of crime). Lott also touches on subjects such as such as how women's suffrage led to the growth of government pervasiveness, including the onset of prohibition.
The book, however, isn't entirely about dispelling the notion that we're out to get one-another. There are stories about how professional licensing is used to limit competition and how members of political parties write laws, such as those on campaign finance reform, keep themselves in power. And what of predatory pricing? Lott describes not only why this is such a rare practice in the private sector, but also how government can be one of the biggest predators of all.
For example, why aren't there more private weather forecasting services? Lott tells us that this was not the case in the 1980's, a time when entrepreneurs offered specific forecasts to television stations. The National Weather Service, however, soon began offering the same forecasts without charge, driving the entrepreneurs out of the market.
Now fast-forward to today. Any forecasting entrepreneur will think twice if he sees an opportunity to earn a profit by providing a forecast product not currently available. Because of government's non-profit nature, entrepreneurs know the National Weather Service can easily offer the same product at no charge. So they stay out of the market and private innovation is thwarted in the process.
This well-written and provocative book showcases Lott's own research with numerous co-authors, as well as the research of others. Readers of this blog no doubt know about the lawsuit. The title of the book is unfortunate, because some may think it is little more than another stitch in that suit. The book is, in part, a rebuttal to Levitt and Dubner's Freakonomics. Readers, however, will find that Freedomnomics is a book that can stand alone in its own light. John Lott has given us a book that gives an important perspective on the workings and intricacies of markets and what happens when private citizens are economically free.
Digression: I'm not keen on the title of the book, and I was a bit put off by the subtitle "A Rebuttal to Freakonomics and More". When I mentioned this to John Lott, he replied,
When I asked John what the basis might have been for a suit, he told me they were arguing the title was too similar to "Freakonomics" and might confuse some potential buyers.
The publisher decided the title and the subtitle. The publisher picked everything on the cover. This is quite common practice
for popular books. As to the subtitle that mentions the other book, it was added because Harper Collins threatened to sue to prevent publication of the book if some such a statement wasn't added. I argued against it, but the publisher didn't want to risk the book being held up for publication.