Dating Game

QUESTION: A man and a woman are trying to decide where to go on a date.  The woman prefers ballet, but the man prefers going to a football game.  There is some gain to going together, but each would rather go to their preferred activity alone, than together to their less preferred activity.  Diagram this game, and show how best to play.

 ANSWER:

                                                 Man
                                              Football             Ballet
                              Football   (1,4)                  (0,0)
Woman        
                                  Ballet   (2,2)                  (4,1)


The man does better by going to the football game, regardless what the woman does, and the woman does better by going to the ballet, regardless what the man does.  These are called "dominant strategies."  The equilibrium of the game is for each to go to their preferred activity.

Notice, however, that the two players could make themselves better off by cooperating.  Self interest is taking them to a place (2,2) with a lower group payoff than the cells on the main diagonal. 

There are two ways to change the game to increase group payouts.

1. Alternate.  If the couples take turns, their group payout goes up.

2. Have the player that receives the higher payoff, compensate the other player for going to their less preferred activity.

In this case, the man could give 1.5 units to the woman if they go to the football game, which would change the payoff in the upper left to (2.5, 2.5).  This would change the equilibrium of the game.

Alternatively, the woman could give 1.5 units to the man if they go to the ballet.  This is the premise of an off-color South Park episode.

Who benefit (or lost) when Central Banks began printing money?

McKinsey keeps score:

When the central banks began printing money, they bought loans, which is equivalent to an increase in the supply of loans. The price of a loan (interest rates) decreased. Low interest rates benefit borrowers, and hurt lenders:

 The winners: 

• From 2007 to 2012, governments in the eurozone, the United Kingdom, and the United States collectively benefited by $1.6 trillion both through reduced debt-service costs and increased profits remitted from central banks (exhibit). 
• Nonfinancial corporations—large borrowers such as governments—benefited by $710 billion as the interest rates on debt fell. 
• Although ultra-low interest rates boosted corporate profits in the United Kingdom and the United States by 5 percent in 2012, this has not translated into higher investment, possibly as a result of uncertainty about the strength of the economic recovery, as well as tighter lending standards. 

The losers:

• Meanwhile, households in these countries together lost $630 billion in net interest income, although the impact varies across groups. Younger households that are net borrowers have benefited, while older households with significant interest-bearing assets have lost income.

When the banks begin tapering, will the losers  become winners and vice-versa?

Never start a land war in Asia, ...

or a price war.

If you want to compete, choose a dimension (differentiate your product, lower your costs, design an advertising campaign) that is difficult for your competitors to mimic.

Joker's (flawed?) game theory

Should the Joker have predicted this outcome using game theory?  Construct payoffs such that this is an equilibrium.  

HT:  David S.

Make the rules or your rivals will: use anti-growth activists to erect entry barriers

A recent paper by former student Mike Saint's consulting group shows how to erect barriers to entry to protect your market share, without running afoul of the antitrust laws:

The courts have sanctioned the right to organize community opposition that urges government officials and agencies to deny land use permits to applicants, even when the underlying motive of the opposition is protecting market share and eliminating competition. What’s more, the courts are protecting third-party funding sources, in many cases anonymous funding sources, which support the opposition efforts in order to block potential competition.

 The classic example of this is a local grocery story or gas station organizing opposition to zoning changes that would permit Wal-Mart to enter a market.

See related posts: 

Are the Wal-Mart battles over?

Make the rules or your rivals will

Sales Below Cost Laws

Unions using zoning laws against Wal-Mart

Why not just give money to poor people directly?

NPR's Planet Money has another episode that almost justifies the enormous amount of subsidies given to it.  They document an experiment giving $1000 to very poor people in Kenya and in Liberia. 

Those in Kenya did well, and it seemed to result in permanent improvement in their lives.  In Liberia, the results were temporary, probably because the economy is so inefficient in Liberia. 

Long run vs. short run

President Maduro is trying to win re-election so he seized the biggest electronics store and held a "sale."

In the short run, people get cheap stuff and they are happy.  But in the long run, he has reduced the incentive of retail outlets to serve people. 

This summer, I warned him about these kinds of policies, and I even sent him an autographed copy of my textbook.

Someone please get him to read chapter two. 

Using Randomized Experiments to Fight Poverty

Esther Duflo's inspiring TED Talk:

Health is an investment

...so to make people healthier, we have to get them to invest.  TED talk by Emily Oster:

John McMillan's Rational Pigs Puzzle

To illustrate how game theory works, I sometimes pose this puzzle in class, taken from John McMillan's terrific book, Games, Strategies, and Managers.

 QUESTION: Two pigs, one dominant and the other subordinate, are put in a pen. There is a lever at one end of the pen which, when pressed, dispenses 6 units of food at the opposite end. It "costs" a pig 1 unit of food to travel from the food to the lever and back.

If only one pig presses the lever, the pig that presses the lever must run to the food; by the time it gets there, the other pig has eaten 4 of the 6 units. The dominant pig can push the subordinate pig away from the food, and cannot be moved away from the food by the subordinate pig.

If both pigs press the lever, the subordinate pig is faster, and eats 2 of the units before the dominant pig pushes it away.

QUESTION: If each pig plays rationally, optimally, and selfishly, which pig will press the lever?

To answer the question, construct a simultaneous game, where the "payoffs" to the pigs are the net amount of grain consumed.

 ANSWER:  The subordinate pig always does better by not pulling the lever, regardless of what the the other pig does.  This is called a "dominant strategy."  The dominant pig's best response to this strategy is to pull the lever.  The unique equilibrium is for the dominant pig to pull the lever and consume 1 net unit of food while the subordinate pig consumes four.

                                                 Subordinate pig
                                              Pull              Don't Pull
                                   Pull   (3,1)                  (1,4)
Dominate pig        
                           Don't Pull  (6,-1)                 (0,0)


Ironically, with these payoffs, the subordinate pig will soon become dominant.  Then the equilibrium will change.