Markets, Game Theory and 2019 National Elections

Elections are knocking, and I find it difficult to resist from being carried away in the frenzy. Before we begin, there are no left or right views, nor projections, just expanding on a random thought that emerged — which game theory principles, if at all, would dictate the democracy dynamics.

Also, it’s a lazy Saturday, ignore typos or suggest edits, if you feel like.

If you tend to look at political parties as brands, and voters as the consumers, you can compare the political campaigns of the parties, to that of a brand’s customer acquisition strategies. In this context, thinking out loud from first-principles about markets, game theory, and elections.

Let us begin by building from the basics — market structures.

The fundamental characteristics of any market are differentiated on many factors like the quality and quantity of producers, setting up pricing, and barrier to entry. There are four different structures :

Perfect Competition: low entry barrier, market decides the price, eg. Vegetable Market

Monopoly: extremely high barrier entry, the price is determined by the player, eg. De Beers diamonds.

Monopolistic Competition: low barrier to entry, lots of sellers, similar but not identical products, price depends upon competitors. eg. Pizza shops.

Oligopoly: a high barrier to entry, relatively fewer players, similar but not identical products, price depends upon the brand, but is mostly governed by demand and competition, eg. high-end smartphones.

Political parties at the national level demonstrate the oligopoly structure. The entry barrier is huge, there are relatively fewer players, and the offerings are a hybrid of what their competitor promises and what the voters demand.

It is difficult for Apple to price its smartphone say at $6000 straightaway, for skipping few fanboys, most will shift to Android systems, the major players have rarely demonstrated mutually increasing prices, the concept of collusion is illegal in many countries and has never served any market well.

This leads to a scenario where competing by changing prices is not a feasible solution, which brings in non-price competition, and is achieved by defining unique value propositions. These features are brought out in the eyes of the consumers by advertising.

Likewise in a democracy, parties indulge in non-price competition and tend to advertise to raise the awareness.

The problem with advertising is the return on ad spends, how much can one keep spending on advertising? Additionally, to recover this cost, the price of the product needs to be increased, and eventually the customer is led to the competitor. How does one deal with this conundrum?

Game Theory is the answer to this problem, it is the study of strategic decision making, and was designed by John Van Neumann, and Osker Morgenstern in 1944, and is considered a breakthrough study of oligopoly markets.

It has three major components:
- Players: decision makers.
- Strategies: decision.
- Payoff: outcome of the decision.

Two major types:
- Zero-sum-game: profit of one is another’s loss, an eg. stock market
- Non-zero-sum game: profit of one does not affect the profit / loss of the other.

Let us see, how game theory applies to elections. Let us do a simple simulation.
- Players: Rahul, and Narendra.
- Strategies: Advertise, Don’t Advertise.

Whether or not the other player advertises, it is always advisable for each to advertise. The dominant strategy for each of them would be to advertise, which will eventually lead to a Nash Equilibrium. Hence, we see each of the parties doing their bit, since shifting from advertising to non-advertising they gain nothing.

1. Prisoner’s Dilemma

To dig a little deeper let us take one of the famous game theory constructs of The Prisoner’s Dilemma with the Rafale deal. Two players Rahul and Narendra.
- Proposition 1: If they don’t blame the other party out, both are deprived of significant attention shifts.
- Proposition 2: If Rahul blames and Narendra confesses, Rahul gets power, Narendra goes away.
- Proposition 3: If both confess, both are deprived of attention spans and vote shares.

Nash equilibrium is achieved when both of them prove why the other person is wrong. Narendra talks about how the other party is playing with national security by preventing it from acquiring state of art equipment, and Rahul says, how Narendra has favoured one of his aides.

How long and till when this blame game or the optimal strategy keep working? Also, if the optimal solution is to always blame, this has a bad implication towards the society.

In reality, there is no immediate added incentive for individuals to play fair, this is where the idea of punishment comes in, in a democracy it comes in the form of elections. The purpose of punishment is to reduce payoffs from activities that would otherwise hamper the growth and well-being of society.

Prediction : Rafale will continue until SC intervenes, from the other side, dynasty and its previous corruption records will keep getting unearthed.

2. Schelling Point

In the absence of proper communication people pick a common intuitive decision. Human beings have converged towards a common point, be it a nation, caste, or religion, they are demonstrations of this very nature. What are the obvious Schelling points going to be? Nationalism, Religion.

Prediction : We will hear a lot of Hindutva(ram mandir, PMs shrine visits), and Pulwama.

3. Co-ordination Problem
A group tends to pick convenience and populism as the fundamental decision parameters, when and if, they have to shift to something new.

It was 2011ish when Prashant Kishore advised Mr Modi to take up social media, 8 years down the line, all parties have similar modus operandi. It was convenient for people, and almost everyone was there.

Miss Mayawati paid a huge price in 2017 UP state elections by not acknowledging what can be termed as “easy shifts”.

Prediction : Mega campaigns over twitter, including spats.

4. Bounded Rationality
People tend to follow the simplest and most convenient path even at the cost of high-payoffs.

People will opt for the leader that makes it simpler for them to pick.

Prediction : Not having a PM candidate, will make things difficult for congress. 2014 vote shares were primarily anti-corruption wave, 2019 might have the NaMo’s international stature wave, despite poor economic reforms.

5. Principal-Agent Problem
When an individual is allowed to decide on behalf of another, he will prioritize his own best interests, and carry out his own politics.

The left has been yelling the same for the last 4.5 years :)

6. Free-Rider Problem
If every individual tries to leverage from a common resource, at the cost of others, will eventually lose his leverage.

Polarisation in the name of religion stopped producing drastic gains as seen in 2016 West Bengal State elections.

Prediction : Less likelihood of violence in the name of religion, the politics of polarisation in the name of religion is not going to yield expected dividends.

Just some food for thought on how the game-theory construct applies to democracy. Hope you liked it.

Shifting on to a different note, since we are talking about India as a democracy. If we were to take key points from the James Surowiecki’s book The Wisdom of Crowds, it will be as follows :

1. Big groups can solve problems better than individuals.
2. The more diverse the group, wiser its decisions.
3. The bigger the group, the more intelligent it is.
4. Groups can be intelligent only if they are made up of many independent thinkers.
5. Most intelligent groups have decentralised structures but pool their information into one central place.

We as a nation have all the boxes ticked, no matter what the local minima or maxima, our culture has survived centuries and will keep evolving with time, we are on the verge of getting rid of mental blocks from those 1000 years of slavery. We are not just the biggest, but one of the best democracies.

Further Read: Political Game Theory by Princeton Prof Nolan McCarty
Adam Meirowitz