In economic theories, the Market is a strategic game where players compete, some cooperate. Welfare economics suggests that there are participants who become better off or, to say, winners, while some become worse off or losers. While most of us are tired of competition, particularly because it takes away business from us, it cannot be denied that there are many benefits of competition. So should we choose to cooperate with other market participants or is it important to have competition to get better bargains?
Each one of us is an individual with unique perceptions of reality. If we were to think of our gain and prosperity as an individual, we’d definitely go for the course of action that yields maximum gains and keeps us far away from losses, but is it actually feasible in reality? Isn’t it a bit of an illusionary concept? And why is it just an illusion and not reality?
The answer is simple- since we live not as individuals, but as a society, our individual course of action is affected by those in our surroundings; because we’re not the only ones in the market, this notion is just a mirage or to say a day dream that would be true if there is only one buyer and one seller. At any given point of time in the market there are numbers of buyers and sellers competing against and interacting with each other. As a result, our outcomes are affected by our surroundings and then it’s time to make decisions and apply game theory to real life scenarios.
An Individual can predict only his own course of action, not of his competitor and it would be easy to make favorable outcomes if this prediction was possible, but it is not, so understanding this theory helps make some real sense in this dynamic world.
Game theory basically studies the interaction between participants in a competitive market to make rational decisions and achieve optimal results. It recognises the interdependence among different players in the Market. In game theory, a payoff matrix is a table in which strategies of one player are listed in rows and those of the other player in columns and the cells represent payoffs to each. Consider this payoff matrix:
In the above example, there are only two companies engaged in the market with two different budgets for advertising, and they both have to decide which strategy to choose. Cells represent the income earned by both firms. John Nash, a famous economist, showed that for any finite game, all the players can arrive at an optimal outcome, known as the Nash equilibrium, when considering the possible actions of the other players. But since none of the players are aware of other’s actions they act out of self-interest, and players end up in a worse scenario than if they collaborated.
Let’s take an example of the Organization of Petroleum Exporting Countries (OPEC)- the cartel where member nations choose to coordinate and unify to establish a stable and beneficial supply of crude oil in the market. Crude oil prices have historically risen when OPEC output targets are decreased. OPEC members supply over 40% of the world’s crude oil. OPEC’s oil exports are also essential for global pricing because they account for over 60% of total petroleum traded internationally. Since OPEC as producers have no control over the demand for petroleum, they tend to change its supply in order to influence the price. They simply increase or decrease the supply of crude oil, ergo granting them considerable influence over its price. This shows how these countries realize the need to coordinate with other market players in order to gain maximum. They together have a great impact on overall oil supply and influence it to get profits.
The current storyline however, can bring about wonders. With oil prices on the rise, OPEC members are currently facing a dilemma, expanding output caps can become the root of making more room in the market for non-member competitors like the US and Russia while coordinating a higher amount of output means lowering prices. So they might not do either but due to this members may contemplate whether they should choose to cooperate or cheat by withdrawing from collusion to have a better bargain than they have if they choose to continue being a member.
Since crude oil prices are on the rise, it means that members have even more incentive to cheat and produce more than their share. Moreover, since marginal revenue is higher than at lower prices, there is greater payoff from each additional unit of output produced— even in the face of production caps.
At the same time, the opportunity cost of compliance rises. As non- OPEC suppliers like the US are capturing market shares rapidly, a key reason is that the market is becoming increasingly dominated by producers outside the organisation of the petroleum exporting countries.
By looking at the future we can chalk out a picture of how supply side economics works. If OPEC members choose to withdraw, they’ll have relative freedom to supply as much crude oil as they want, tempting other countries also to withdraw from collusion and be independent suppliers and competitors in the market, but will it benefit them? Or do they cause more harm than good not only to themselves but also to the whole industry? Supply side economics explains that when everyone amps up production, price slopes downwards, elasticity curve becomes flatter as a result players end up in worse off situations. Ultimately, coordinating supply is the only strategy through which they can reach optimal outcomes. So being competitive is a good strategy, but only as long as we have comparative advantage over others.
However, many economists are supporters of competition as they opine that competition is good for society. It maintains a high quality even at a lower price and makes room for innovation. Profits are affected but overall consumption increases.
Decades ago, in the production era, before 1991, companies just used to produce material and concentrated very less on selling them or differentiating them. After independence decision makers followed the mixed economy system dominated by the public sector. But soon in the late 1990s they felt a need for economic reforms, moving towards a more liberal and globalised economy, promoting competition and encouraging innovation. All of that has changed as a result of competition.
Have you ever noticed that most people in India are tired of government services? Do you know why this is the case? It is because the government doesn’t face competition. Dearth of competition inevitably leads to complacency and inefficiency. Moreover, the government is moving towards privatisation to encourage more innovation. Under the new PSE policy, the centre has entrusted the Department of Public Enterprise (DPE) with the responsibility of identifying PSUs for privatisation or closure in non-strategic sectors.
As said, competition is not always beneficial. Karl Marx’s Theory of Competition explains that increasing competition would not produce better goods for consumers; instead, it would lead to price war, bankruptcy among capitalists and much more. Former capitalists who had gone bankrupt would join the proletariat, eventually forming an army of the unemployed. Competition in business leaves companies with a smaller slice of the proverbial pie and a smaller share of the target market. Furthermore, the market economy, which is unplanned by its very nature, would face massive supply-and-demand problems, resulting in severe depressions.. This shows how competition is not always a good strategy to maximise welfare.
To sum up everything that has been stated so far, we can now conclude that the market is a complex phenomenon and the strategy to be chosen depends upon a number of factors involving individual competency to grab opportunities. While cooperation is the converse of competition, the desire or need to compete with others is a common momentum that encourages individuals to form a group and cooperate with one another in order to form a stronger competitive force.
Sanya Tiwari
First Year Undergraduate Student, SRCC
Reference
http://large.stanford.edu/courses/2017/ph240/wilcockson1/
https://www.masterclass.com/articles/game-theory-in-business-explained#how-is-game-theory-applied-in-business
https://academic.oup.com/cje/article-abstract/41/6/1559/3057430
https://www.opec.org/opec_web/en/data_graphs/330.htm
Each one of us is an individual with unique perceptions of reality. If we were to think of our gain and prosperity as an individual, we’d definitely go for the course of action that yields maximum gains and keeps us far away from losses, but is it actually feasible in reality? Isn’t it a bit of an illusionary concept? And why is it just an illusion and not reality?
The answer is simple- since we live not as individuals, but as a society, our individual course of action is affected by those in our surroundings; because we’re not the only ones in the market, this notion is just a mirage or to say a day dream that would be true if there is only one buyer and one seller. At any given point of time in the market there are numbers of buyers and sellers competing against and interacting with each other. As a result, our outcomes are affected by our surroundings and then it’s time to make decisions and apply game theory to real life scenarios.
An Individual can predict only his own course of action, not of his competitor and it would be easy to make favorable outcomes if this prediction was possible, but it is not, so understanding this theory helps make some real sense in this dynamic world.
Game theory basically studies the interaction between participants in a competitive market to make rational decisions and achieve optimal results. It recognises the interdependence among different players in the Market. In game theory, a payoff matrix is a table in which strategies of one player are listed in rows and those of the other player in columns and the cells represent payoffs to each. Consider this payoff matrix:
In the above example, there are only two companies engaged in the market with two different budgets for advertising, and they both have to decide which strategy to choose. Cells represent the income earned by both firms. John Nash, a famous economist, showed that for any finite game, all the players can arrive at an optimal outcome, known as the Nash equilibrium, when considering the possible actions of the other players. But since none of the players are aware of other’s actions they act out of self-interest, and players end up in a worse scenario than if they collaborated.
Let’s take an example of the Organization of Petroleum Exporting Countries (OPEC)- the cartel where member nations choose to coordinate and unify to establish a stable and beneficial supply of crude oil in the market. Crude oil prices have historically risen when OPEC output targets are decreased. OPEC members supply over 40% of the world’s crude oil. OPEC’s oil exports are also essential for global pricing because they account for over 60% of total petroleum traded internationally. Since OPEC as producers have no control over the demand for petroleum, they tend to change its supply in order to influence the price. They simply increase or decrease the supply of crude oil, ergo granting them considerable influence over its price. This shows how these countries realize the need to coordinate with other market players in order to gain maximum. They together have a great impact on overall oil supply and influence it to get profits.
The current storyline however, can bring about wonders. With oil prices on the rise, OPEC members are currently facing a dilemma, expanding output caps can become the root of making more room in the market for non-member competitors like the US and Russia while coordinating a higher amount of output means lowering prices. So they might not do either but due to this members may contemplate whether they should choose to cooperate or cheat by withdrawing from collusion to have a better bargain than they have if they choose to continue being a member.
Since crude oil prices are on the rise, it means that members have even more incentive to cheat and produce more than their share. Moreover, since marginal revenue is higher than at lower prices, there is greater payoff from each additional unit of output produced— even in the face of production caps.
At the same time, the opportunity cost of compliance rises. As non- OPEC suppliers like the US are capturing market shares rapidly, a key reason is that the market is becoming increasingly dominated by producers outside the organisation of the petroleum exporting countries.
By looking at the future we can chalk out a picture of how supply side economics works. If OPEC members choose to withdraw, they’ll have relative freedom to supply as much crude oil as they want, tempting other countries also to withdraw from collusion and be independent suppliers and competitors in the market, but will it benefit them? Or do they cause more harm than good not only to themselves but also to the whole industry? Supply side economics explains that when everyone amps up production, price slopes downwards, elasticity curve becomes flatter as a result players end up in worse off situations. Ultimately, coordinating supply is the only strategy through which they can reach optimal outcomes. So being competitive is a good strategy, but only as long as we have comparative advantage over others.
However, many economists are supporters of competition as they opine that competition is good for society. It maintains a high quality even at a lower price and makes room for innovation. Profits are affected but overall consumption increases.
Decades ago, in the production era, before 1991, companies just used to produce material and concentrated very less on selling them or differentiating them. After independence decision makers followed the mixed economy system dominated by the public sector. But soon in the late 1990s they felt a need for economic reforms, moving towards a more liberal and globalised economy, promoting competition and encouraging innovation. All of that has changed as a result of competition.
Have you ever noticed that most people in India are tired of government services? Do you know why this is the case? It is because the government doesn’t face competition. Dearth of competition inevitably leads to complacency and inefficiency. Moreover, the government is moving towards privatisation to encourage more innovation. Under the new PSE policy, the centre has entrusted the Department of Public Enterprise (DPE) with the responsibility of identifying PSUs for privatisation or closure in non-strategic sectors.
As said, competition is not always beneficial. Karl Marx’s Theory of Competition explains that increasing competition would not produce better goods for consumers; instead, it would lead to price war, bankruptcy among capitalists and much more. Former capitalists who had gone bankrupt would join the proletariat, eventually forming an army of the unemployed. Competition in business leaves companies with a smaller slice of the proverbial pie and a smaller share of the target market. Furthermore, the market economy, which is unplanned by its very nature, would face massive supply-and-demand problems, resulting in severe depressions.. This shows how competition is not always a good strategy to maximise welfare.
To sum up everything that has been stated so far, we can now conclude that the market is a complex phenomenon and the strategy to be chosen depends upon a number of factors involving individual competency to grab opportunities. While cooperation is the converse of competition, the desire or need to compete with others is a common momentum that encourages individuals to form a group and cooperate with one another in order to form a stronger competitive force.
Sanya Tiwari
First Year Undergraduate Student, SRCC
Reference
http://large.stanford.edu/courses/2017/ph240/wilcockson1/
https://www.masterclass.com/articles/game-theory-in-business-explained#how-is-game-theory-applied-in-business
https://academic.oup.com/cje/article-abstract/41/6/1559/3057430
https://www.opec.org/opec_web/en/data_graphs/330.htm