Strategic Islands in Economic Games: Isolating Economies From Better Outcomes

Abstract

Many of the issues we face as a society are made more problematic by the rapidly changing context in which important decisions are made. For example buying a petrol powered car is most advantageous when there are many petrol pumps providing cheap petrol whereas buying an electric car is most advantageous when there are many electrical recharge points or high capacity batteries available. Such collective decision-making is often studied using economic game theory where the focus is on how individuals might reach an agreement regarding the supply and demand for the different energy types. But even if the two parties find a mutually agreeable strategy, as technology and costs change over time, for example through cheaper and more efficient batteries and a more accurate pricing of the total cost of oil consumption, so too do the incentives for the choices buyers and sellers make, the result of which can be the stranding of an industry or even a whole economy on an island of inefficient outcomes. In this article we consider the issue of how changes in the underlying incentives can move us from an optimal economy to a sub-optimal economy while at the same time making it impossible to collectively navigate our way to a better strategy without forcing us to pass through a socially undesirable “tipping point”. We show that different perturbations to underlying incentives results in the creation or destruction of “strategic islands” isolated by disruptive transitions between strategies. The significant result in this work is the illustration that an economy that remains strategically stationary can over time become stranded in a suboptimal outcome from which there is no easy way to put the economy on a path to better outcomes without going through an economic tipping point.

Keywords

• game theory
• sub-rational choice
• quantal response equilibrium
• tipping points
• economic stranding
• maximum entropy