| Thinking Strategically / Avinash K. Dixit and Barry J. Nalebuff | ||||||
| Reviewed by Tal Cohen | Monday, 04 December 2006 | |||||
In fact, the authors are not ashamed to claim (in the Introduction) that:
Quite pretentious, and in this sense — the truth be told — the authors simply fail to deliver. If you’re interested in economics, you might enjoy reading the book, which is generally well-written. But don’t read it as “a guide for better life,” and don’t expect any miracles. This is no more than a popular science book about a research field in economics. The book can certainly help you better understand some of the events in the world of economics all around us. Consider the following nice example, one of many such examples in the book: Crazy Eddie, and stereo shop in New York, guarantees the lowest possible prices: should you purchase a product and then find a lower price offer (in print), Crazy Eddie will pay you back the difference, and more — in fact, they’ll pay you back as much as twice the difference. Newmark & Lewis, a competing store, also offers a very similar guarantee. On the face of it, this looks like a case of very rough competition, where each store is certain to offer the lowest possible price indeed, lest it be undersold. But a wise observer will note that offering back more than the difference ensures, in fact, that there is no competition at all: if, for example, Crazy Eddie sells a given product for $100, while Newmark & Lewis sell it for only $90, any reasonable consumer will buy the product at Eddie’s, and then claim the more-than-$10 refund, resulting in a lower-than-$90 total price. The lower Newmark & Lewis’s price, the more lucrative Crazy Eddie becomes... Therefore, the guarantee is nothing more than a threat to competitors, preventing them from offering lower prices. And since both shops offer the same guarantee simultaneously, the result is nothing other than a cartel agreement — the two stores may not compete with each other! You might think that this agreement only affects these two shops, and does not bind any new business (“Store C”) that might open up nearby. But if Store C offers the same product at a lower price, consumers will again prefer one of the two other shops, due to the promised refund. Ergo, the cartel agreement also prevents new players from starting a competition, and they are better off selling the product at the same price offered by both Eddie and Newmark & Lewis. The cartel does not enforce low prices: the new store can certainly sell the product for more, if they so wish, and distinguish itself with a better location, reputation, service, or whatever. And this is apparently the reason why stereo systems in New York do not sell for as low as they might have, and the profit margins for retailers are surprisingly high. The book contains many examples, mostly varied and entertaining. In some cases (especially in the first few chapters) one cannot avoid the thought that the examples are too great a simplification of reality: every player (adversary) has exactly two options, there are very few players (often only two), etc. And although the discussion deepens later on, the examples are still simplifications, which are hard to apply in realistic cases. The authors are fair enough to specify this; the Cuban Missile Crisis, for example, is analyzed as if it only involved two players (U.S. President John F. Kennedy and Soviet premier Nikita Khrushchev), while in reality each player faced not only the other, but also his opposition at home, military and civilian authorities in his country, and so on. It is clear that even the more complex and realistic model can be analyzed using game theory, except that it becomes unwieldy, and it is not even clear how to measure success. Another issue that bothered me with the book is the abundance of examples from the world of sports. At first I thought that it is just because I’m hardly familiar with the rules of baseball and American football, but even examples from tennis heavily bored me, so the problem is apparently with my attitude towards sports more than with the book itself. To summarize, I recommend that you approach this book with the right attitude. If you do not expect anything life-changing from it, and treat it as no more than a popular economy book, you are very likely to enjoy it. You’ll get to learn about terms such as “zero-sum game” or “winning strategies,” which are often misused in the general media. And if — after reading Thinking Strategically — you develop a real interest in the field, consider textbooks such as Fudenberg and Tirole’s definitive Game Theory, or Dutta’s Strategies and Games: Theory and Practice, which I’m told is more appropriate for business students.
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