1 - Markets and games

Summary

Strategic foundations of perfect competition

In these lectures I report on a research program that began in the early 1980s. It is part of a larger effort, underway for a much longer time, to provide strategic foundations for the theory of perfect competition. The theory of competition has held a central place in economic analysis since the time of Adam Smith (1976). By providing strategic foundations for the theory of competition, economists use the principles of game theory to motivate or justify a macroscopic description of markets in which certain behavioral characteristics, such as price-taking behavior, are taken for granted. Game theory begins with individual agents and models their strategic interaction. A strategic foundation for competitive equilibrium must show how strategic interaction by rational agents leads to competitive, price-taking behavior. In practice, this research program includes the following three steps:

1. 1. First, describe a market or a whole economy.

In this step, the economist has to specify the commodities traded, the agents (households and firms) that make up the market or economy, their preferences, their resources, and the available technology.

1. 2. Secondly, define an extensive-form market game describing the behavior of the agents in the market or economy.

In this step, the economist has to specify the players, the information available to each player, the strategies available to them, the outcomes resulting from their choices, and the payoffs received.