Games Economists Play: A Noncooperative View

Abstract

* For some thirty years following World War II, most bright young economists did not go into industrial organization. It was not hard to see why this was so. The quick, big payoffs in economics tend to go to theorists, and industrial organization was a subject in which theory was not only unsatisfactory, but moribund. The promise of the Chamberlin-Robinson revolution of the early 1930s had not been fulfilled, and, while institutional and verbaltheoretic writings on the subject were sometimes illuminating, there was no hard analytic theory formalizing the structure-conduct-performance paradigm. Oligopoly, in particular, showed no signs of analytic tractability. Today, the atmosphere is altogether different. The profession is full of young theorists whose principal occupation is industrial organization. Indeed, industrial organization has become the hot topic for microtheorists. Journals, meetings, and seminars abound in research on oligopoly, and, judging by the market, this is a booming industry. Of course, the principal reason for the change is the rise of game theory and its applications in these areas. Von Neumann and Morgenstern's great work was published in 1944 and hailed immediately by theorists (von Neumann and Morgenstern, 1944). Jacob Marschak, indeed, stated in reviewing it (Marschak, 1946, p. 1 15 ): Ten more such books and the progress of economics is assured. Nevertheless, it was not until the last decade that game theory came to the ascendant as the premier fashionable tool of microtheorists. That ascendancy appears fairly complete. Bright young theorists today tend to think of every problem in game-theoretic terms, including problems that are easier to deal with in other forms. Every department feels it needs at least one game theorist or at least one theorist who thinks in game-theoretic terms. Oligopoly theory in particular is totally dominated by the game-theoretic approach. The field appears to be in an exciting stage of ferment. To understand why I believe that such excitement is not warranted, it is necessary to step back, briefly review the history of oligopoly theory before the game-theory revolution, and consider what it is that one wants theory to deliver.