Page 147 - Global Political Economy_Understanding The International Economic Order

CHA PTER S IX
esoteric subject, but stated as simply as possible, the theory of games
attempts to predict or explain outcomes of human interactions where
the players are few in number and each player has a choice of alter-
native courses of action or strategies. Each individual’s strategy is
based in part on what that individual believes the strategy or strate-
gies of the other player or players might be. Thus, game theory ana-
lyzes situations characterized by strategic uncertainty and interdepen-
dent decision-making. In other words, “I think that he thinks that I
think...” ad infinitum.
According to game theory, each individual player chooses whatever
strategy clearly maximizes gains or minimizes losses. The outcome of
the game could be either losses or wins for either one or both of the
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players. While in some cases the outcome of a strategic game can be
predicted easily, this is not always the case. In a “Nash equilibrium”
situation, the outcome may be predictable. Such a situation is defined
as an array of strategies from which no player has an incentive to
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deviate. In a Nash equilibrium where one array of strategic choices
unquestionably dominates and is preferred by each player over all
other possibilities, there can be only one outcome that will be satisfac-
tory for both players. In other words, in such situations, oligopolistic
competition may be indistinguishable from perfect competition.
However, the real world of oligopoly is generally characterized by
many situations in which a number of Nash equilibria are possible.
This means that game theory is of little use in describing or predicting
business behavior in situations of mutual interdependence.
The possibility of multiple equilibria has profound implications for
both economics and political economy. Many, if not most, strategic
situations in which firms and states find themselves do have many
feasible equilibrium points or, in the jargon of the field, are said to
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have “multi-equilibria.” Instead of one obviously best array of strat-
egies for both players, there are several possible arrays. In fact, there
can be an infinite number of equilibria that promise to each cooperat-
ing player higher returns than would result from noncooperative be-
havior. In such situations, it is difficult and perhaps impossible to
determine which array of strategies will be selected by the players.
Thus, even in the case of cooperative players, it may be difficult to
achieve a mutually satisfactory solution.
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The essence of game theory is discussed in Chapter 4.
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David M. Kreps, Game Theory and Economic Modeling (Oxford: Clarendon
Press, 1990), 28.
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James D. Morrow, Game Theory for Political Scientists (Princeton: Princeton Uni-
versity Press, 1994), 306.
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