Economics Questions

Re: Menger uses game theory example in discussion of monopoly.

abskebabs — Tue, 04 Oct 2011 11:20:44 GMT

Thanks for your responses.

@Bert, what you said when there are 2 competitors, is exactly Menger's point, which is why he later labels bilateral competition as the first case of true competition, as it is no longer in the interests of either party to destroy any of the produced stock. But what is also interesting is as he mentions earlier, that as a monopolistic combine's market grows, it also tends to "call forth" competition. This makes sense, given the larger a market is, and the more elastic the demand curve is in the region of where Q=the amount the monopolist is supplying, the more profitable it would be to enter the market.

I'm beginning to think that the isolated monopolist/single-seller without government privelige, might in many cases not at all be an "inefficient" outcome. If the demand curve is highly inelastic for a particular monopolised market, it would not only be unprofitable for either the monopolist to increase production or competitors to enter the market, but this would also mark a waste of resources, especially of higher order and more convertible factors of production that could be applied in more profitable uses, which would also cause a tendency to raise these factor prices, leading to a tendency to remove the profit margin for the monopolist.

Re: Menger uses game theory example in discussion of monopoly.

vive la insurrection — Tue, 04 Oct 2011 08:37:19 GMT

How I am reading it (and I didnt read the link), I still don't see how it falls under the scope of economics. It seems like it is somewhat of a sociological expectations issue acting under the assumption how existing structures outside of the market ought to regulate something (be it courts, military, govt subisdy, or whatever).

If anything it may fall under the realm of expectation and customary transaction costs that the market was not dealing with to begin with?

Re: Menger uses game theory example in discussion of monopoly.

Bert — Mon, 03 Oct 2011 06:34:08 GMT

I find it odd that someone would freely destroy a portion of their commodity to raise prices by purposely creating a shortage. We know now that the government will pay farmers to do something along these lines, but it seems backwards to be doing so with no outside interference. If you take the customers as being ignorant of how much there really is the monopolist could just manipulate prices from the start and make it seem that's all their is, and no one would be the wiser, and when that stock is sold, bring out the over stock and sell for a different price (higher or lower).

If it's divided between two competitors (equally) then it would seem to be the interest of either one to sell at the lowest price, and I would like to assume in time the lowest priced good will sell faster than the other. Let's say one sold the 500 for 7 pounds of silver, and the other sold for 8 pounds of silver. It would see the first would sell out quicker and make a larger profit than the other in a much shorter time scale, but that depends on their own time preferences and the demand of that good.

If the idea of destroying a portion of your stock seems custom (for whatever reason), one competitor could predict such a reaction from the other, and ta-dah!, you have 500 while the other has 300. Sell at the same price or lower til their stock runs out, and with the rest it's all profit over the competitor.

Menger uses game theory example in discussion of monopoly.

abskebabs — Sat, 01 Oct 2011 21:04:09 GMT

i just re-read Menger's section on competition in his Principles of Economics (see pp. 216-225). While quite an enlightening section in its own right, especially in the sense that Menger sees monopoly as actually an organic, primitive stage in economic development generally prior to competition and the greater efficiency and lower wastage of resources it brings about, he outlines the differences in the resulting economic behaviour under both regimes in a manner I find very similar to simple game theoretic analyses of oligopoly. I don't know how aware Menger was of the works of Bertrand and Cournot, indeed he may have arrived at the same problem independently, indeed perhaps Morgenstern even found some inspiration here for his later work initiating game theory.

In any case, speculation aside, Menger first outlines how price determination does not differ, whether there are multiple sellers bringing a quantity of a commodity to market, or one on the resulting price formation and distribution of goods among buyers (with the most competitive bidders obtaining the quantities of the goods at the price of the marginal buyer). He notes however, that if in a certain market, upon the onset of the entry of a new competitor to a market previously monopolised, that this changes what will necessarily be in the economic interests of either competitor in the market in terms of pricing and production. I shall quote Menger directly for the greatest clarity on this:

"In the previous section, we saw that it is frequently in the economic interest of the monopolist to abstain from marketing portions of the whole quantity of the monopolized good available to him, and to destroy them or let them spoil, since he can often obtain a larger profit from a smaller quantity of his goods than he would if he were to sell the entire available quantity at lower prices. Assume that a monopolist has 1,000 pounds of a monopolized commodity and that he can, in the given economic situation, either sell 800 pounds at 9 ounces of silver per pound or dispose of the whole available quantity at 6 ounces of silver per pound. It is thus in his power to take 6,000 ounces of silver for the entire quantity of the monopolized commodity at his command, or to take 7,200 ounces of silver for 800 pounds of it. If the monopolist is an economizing individual pursuing his self-interest, the choice he will make is not subject to doubt. He will destroy 200 pounds of his monopolized commodity, permit them to spoil, or otherwise withdraw them from trade, and will offer only the remaining 800 pounds for sale—or, which amounts to the same thing, he will set his price at such a level that the same result will obtain.

But if the 1,000 pounds of the previously monopolized commodity are divided between two competitors, this policy immediately becomes economically impossible for each of them. If one of the two were to destroy part of the quantity available to him, or if he were to withdraw it from trade in some other way, he would of course elicit a definite increase in the price of a unit of his commodity. But never, or only in very rare instances, would he able to obtain a greater profit by so doing. If A₁, for instance, the first of the two competitors, were to destroy 200 of the 500 pounds of the previously monopolized commodity at his command or otherwise withdraw them from trade, he would doubtless cause the price of the good to rise—from 6 to 9 ounces of silver per pound, for example. But he would not cause a greater total profit to accrue to himself. The consequence of his action would be that A₂ would obtain 4,500 instead of 3,000 ounces of silver, while he himself would obtain only 2,700 ounces of silver (instead of 3,000) in exchange for the other 300 units sold. The intended gain would accrue solely to his competitor, and he himself would suffer a substantial loss."

This conclusion, though substantial in its own right, is also basic game theory; applying the prisoner's dilemma to a situation of duopoly. I was wondering if in light of this or one's own experience of game theory, whether you think it may therefore have some relevance to economics, and should not necessarily be rejected out of hand by Austrians, at least with regard to the analysis of the dynamics of competition, but not necessarily the core of price theory. I think personally, i might be tempted by such an attitude, while at the same time, I am weary of how much modern game theory appears to have evolved into a magnificent monument of mental masturbation. Ariel Rubenstein had a thoughtful, amusing and frankly rather humble paper on this from 2006. I think readers here might enjoy it.