Monday, June 23, 2008
The Game Theory Boom
I'm linking to a nice paper [Nicola Giocoli: Three Alternative (?) Stories on the Late 20th-Century Rise of Game Theory] asking about the reasons for the sudden boom in the use of Game Theory in economics in the eighties. His bottom line is Harsanyi's development of tools for thinking about games of incomplete information, so-called Bayesian games. But he also gives some importance to the following circumstance: The Chicago School completely dominated Antitrust policy in the eighties. I remember in Grad school in the late 70's the suffocating growth of Panglossian Industrial Organization thinking. This was the stuff that would look at any apparent example of restraint of trade - resale price maintenance, eg - and find that it was rational and efficient. Predatory pricing was irrational and could never happen; the only real entry barriers were put in place by the dead hand of the state. Laissez faire; laissez allez, in short. Economists dissatisfied with this picture - in particular, thinkers associated with Stanford's Graduate Schoool of Business such as Paul Milgrom and John Roberts - used Harsanyi's Bayesian techniques to provide rigorous counter-examples to the Chicago conventional wisdom: to show how predation might make sense, how non-state entry barriers - such as building excess capacity, might well succeed, and so on.