Demsetz on Game Theory
By David Henderson
Those who know the late Harold Demsetz’s important role in my life might be surprised that I haven’t posted on him since he died on January 4. The reason is simple: I spent my time on him writing a piece for the Wall Street Journal. It will appear on Monday.
I had limited space for the piece and so there was so much I wanted to say but didn’t have space to say. Here’s a good quote from his autobiographical essay in his 1988 book, Ownership, Control, and the Firm:
Game-theoretic constructs have, or will have, things to say about the interactions of decision-makers when their numbers are small. It is the interest in such situations that gave birth to game theory, and this remains the context in which it does best. My interest, however, is in system-wide forces that render this context less useful. The decentralized, competitive system functions to overwhelm tactical moves that may have been stimulated by interactions between small numbers of decision-makers. The analytical usefulness of the concept of decentralization derives precisely from the fact that it allows the analyst to ignore the behavior of a single individual or a small group of individuals. It implicitly asserts that the tactical measures taken by incumbent firms to bar entrants from an industry cannot long hold at bay the continuous onslaught of more efficient organizations and techniques of production. The analysis of tactical decisions is not likely to be very useful in studying the general and central tendencies of decentralized economic systems, especially when thes result from repeated “plays” in contexts that are not zero-sum in nature. Future developments may convince me of my error in holding this belief; I state it not to persuade readers of its truth, but to give them a better understanding of my interests and perspectives. (italics in original)
Here’s what I got from that. Demsetz is interested in the long-run tendencies of industries and game theory is almost useless for that. What it’s useful for is helping firms figure out how to deal with small numbers of competitors in the short run. Think of Demsetz as a modern Schumpeterian.