The Undercover Economist

Game theory is a field of economics that studies types of transactions and strategies in which a player’s decisions are influenced by the decisions and actions of another participant. Among other things, economists study dating, war, auctions, and poker as examples of places where game theory can lead to a successful outcome. However, game theorists view games as “mathematical objects” and often assume the existence of a hyperrational player quickly making perfect decisions. In real life, people do not behave rationally while participating in games, and this has to be taken into account in order to successfully implement game theory in a real-world scenario like an auction.

Inside information is the economic term for a lopsided power structure in a purchasing scenario. A seller who knows more about their product than the buyer does is benefiting from inside information, and a buyer operating under false economic pretenses to acquire resources from a seller is doing the same. Inside information can only be counteracted by the careful application of incentives to create a more equal buyer-seller framework.

Scarcity is the concept that whoever has the most desired, least accessible resource has power over the rest of the market. Sometimes that power is in the hands of the seller (usually when that resource is a product or skill), and sometimes it’s in the hands of the buyer (for instance, when that resource is money). Companies and industries can also create artificial scarcity in order to force the market to enrich them. Artificial scarcity can be counteracted by economic principles based on the head-start theorem, which levels the playing field and gives advantage to later entries; this also forces established businesses to adapt and compete or risk dying out.