John Von Neumann was a mathematician and one of his many accolades was applying mathematics and his observations of traditional games to create a new discipline – Game Theory. This involves a mathematical approach to decision making whereby different strategies can be assessed. It a tool that not only can be used in Economics, but also can be applied to a broad range of areas and fields of study.
Just as I arrived at work, I was listening to Radio 4 and heard the introduction to the programme In our Time. This one in particular caught my attention because of the name mentioned – Von Neumann, and after arriving in my office I then listened to the discussions surrounding game theory.
The main link is to the discussion from BBC Radio 4, led by Melvyn Bragg, with guests: Ian Stewart, a Professor of Mathematics from the University of Warwick; Andrew Colman, a Professor of Psychology at the University of Leicester and Richard Bradley, a Professor of Philosophy from the LSE. I’ll keep it brief and simply say enjoy!
Podcast
Game Theory (also at) BBC Radio 4, In our Time, Melvyn Bragg (10/5/12) (Programme details)
Articles
Game Theory cannot predict broadcasting future Financial Times, Andrew Edgecliffe-Johnson (4/5/12)
Game Theory, in the real world Phys Org (2/5/12)
Questions
- What is game theory? How is mathematics relevant here?
- The discussion talks about co-operative and non co-operative games. What is the difference between them?
- In the game – walking down the street – draw out the matrix and show whether a Nash equilibrium exists.
- Draw out the matrix for the game ‘Rock, Paper, Scissors’. How can game theory be applied to this game? What is the best strategy to win this game? Can there be a winner?
- Draw out the matrix for the problem of littering when it is non co-operative. Is there a Nash equilibrium?
- What is the Prisoner’s Dilemma? Give some examples of it. Explain why it is an example of a dominant strategy game.
- How is game theory relevant to broadcasting? Think about the role of auctions and also the information given in the Financial Times article.
- Explain how game theory is relevant to the Cold War.
Weather has already been partly blamed for poor economic growth, in particular in December 2010 and January 2011. April 2012 is no different – the wettest April on record is said to have caused the worst performance in sales since March 2011.
Like-for-like sales fell by 3.3%, mainly through lower demand for clothes and shoes. Supermarkets saw an increased demand for warmer food items with the colder weather and demand for home products also increased, with analysts suggesting that people decided to re-decorate their houses rather than venture outside! This was further supported by sales of gardening equipment, which also fell. However, the weather is not always bad – in March, sales were higher than expected, with the unusually warm weather, but unfortunately for growth statistics, the boost in sales in March has been more than offset by the decline in sales in April. Furthermore, there are concerns that the March ‘heat-wave’ may have encouraged consumers to do their summer shopping already and hence summer sales may suffer.
The retail data for April 2012 must be considered carefully, as comparing this month’s sales with the same period last year will be very misleading. Last April, the UK was hit with the Royal Wedding, which did boost sales of many products – underlying sales growth was recorded at 5.2% for the month. However, whilst April sales for 2012 could hardly hope to compete with April sales for 2011, the downward trend is undoubtedly going to cause concern for the government. Helen Dickinson, Head of Retail at KPMG said:
“While May will certainly be brighter than April, the health of the retail sector continues on a downward trajectory.”
Whether or not sales do continue their downward trend depends on many factors, including government policy measures to boost growth and cut unemployment. However, one other variable that may influence the trend is the weather. Here’s hoping that the sun shines and people begin to spend!
Weaker retail sales, job surveys raise risk of longer slump Reuters, Olesya Dmitracova (9/5/12)
Wettest April ‘hits retail sales’ BBC News (9/5/12)
Retail sales slide in wettest April on record Telegraph (9/5/12)
April showers wash out retail sales Financial Times, Sarah O’Connor (9/5/12)
Retail sales slip back 1 per cent as fashion stores weather April showers Independent, James Thompson (9/5/12)
Questions
- Use a demand and supply diagram to illustrate the effects of the weather on equilibrium price and output.
- What other factors besides the weather affect retail sales?
- What government policy measures could be implemented to try to boost the retail sector?
- From the information you are told are there any sectors that surprise you in terms of whether sales have risen or fallen? Explain your answer in each case.
- With sales in April falling, what is the implication for a firm’s profits? What steps might a firm take in a bid to boost sales?
Executive pay has been a contentious issue in recent years, with bankers’ bonuses stealing many headlines. Shareholders have been voicing their opinions on bonuses paid to top executives and the management teams at the banks in question are unlikely to be too pleased with the turn of events.
Nearly one third of shareholders from Credit Suisse opposed the bonuses that were set out to be paid to their executives; more than 50% of shareholders from Citigroup rejected the plan to pay their Chief Executive £9.2m for 2011 and, at the end of April, almost a third of shareholders at Barclays refused to support the bank’s pay awards. Barclay’s Chief Executive was to be paid £17.7m, but this revolt is just another indication of how the tide is turning against having to pay big bonuses to retain the best staff.
Bonuses are essentially there to reward good performance. For example, if a company or bank achieves higher than expected profits, you may support a bonus for the key individuals who achieved this. However, in the case of Barclays, the £17.7m package for the Chief Executive was to be paid, despite him saying that his bank’s performance in 2011 was ‘unacceptable’. I wonder what bonus might have been suggested had the performance been ‘acceptable’?
Revolts over big bonuses are not a new thing for 2012. Over the past few years, more and more resentment has been growing for the huge pay increases received by top managers. Many big companies around the world have seen shareholder revolts and this could mean the tide is beginning to turn on big bonuses. The following articles consider this contentious issue.
Credit Suisse and Barclays investors revolt over pay Reuters, Matt Scuffham and Katharina Bart (27/4/12)
Aviva rocked by shareholder rebellion over pay Guardian, Jill Treanor and Julia Kollewe (3/5/12)
Tide turns on bank bonuses as revolt hits UK Scotsman, Bill Jamieson and Tom Peterkin (28/4/12)
Barclays AGM: ‘We can’t pay zero bonuses, the consequences would be dire’ Telegraph, Harry Wilson (27/4/12)
Barclays shareholders have spoken. The overpaid must listen Guardian, Chuka Umunna (27/4/12)
Barclays suffers executive pay backlash Financial Times, Patrick Jenkins (27/4/12)
Aviva to review pay policy amid investor concerns Wall Street Journal, Jessica Hodgson and Vladimir Guevarra (30/4/12)
UBS faces shareholder opposition over executive pay New York Times, Julia Werdigier (3/5/12)
Low returns stir Europe-wide revolt on bankers’ pay Reuters, Steve Slater and Sinead Cruise (25/4/12)
Barclays targeted over bonuses Telegraph, Louise Peacock (9/4/12)
UBS gets stinging rebuke from shareholders on pay Reuters, Katharina Bart (3/5/12)
Vince Cable urges investors to keep up the pressure on executive pay Guardian, Jill Treanor (4/5/12)
Questions
- To what extent do you think high bonuses are the most important variable to a company in retaining the best staff?
- In The Telegraph article by Harry Wilson, Barclays’ Chairman is quoted as saying: ‘We can’t pay zero bonuses, the consequences would be dire’. What would be the consequences if Barclays did pay zero bonuses?
- What would be the consequence if all UK firms paid zero bonuses?
- How would smaller bonuses affect shareholder dividends?
- The Guardian article by Chuka Umunna says that ‘excessive pay and rewards for failure are bad for shareholders, the economy and society.’ Why is this?
- Should those receiving big bonuses be forced to give them up, if their company has under-performed?
- What are the main arguments for and against paying out big bonuses?
Australia was one of the few economies that seemed to be somewhat insulated from the 2008/09 recession and credit crunch. However, with the UK now back in recession and global economic conditions worsening in much of Europe, Australia has now joined the list of countries that are experiencing economic conditions that are ‘weaker than forecast’.
Today’s world involves economies that are increasingly interdependent, hence the spread of the world economic slowdown. As such, with weak global demand, Australia has started to feel the effects, with demand for its goods and raw materials falling. This has led Australia’s central bank – the Reserve Bank of Australia – to cut its key interest rate (the ‘cash rate’) by more than expected. The rate had been at 4.25% and it was widely believed that a 0.25 percentage point cut would occur. However, the central bank cut the cash rate rate to 3.75% to counter the weakening conditions. The Reserve Bank said:
“This decision is based on information received over the past few months that suggests that economic conditions have been somewhat weaker than expected, while inflation has moderated …Growth in the world economy slowed in the second half of 2011, and is likely to continue at a below-trend pace this year.”
Banks’ interest rates have been falling in Australia for the past few months and this latest cut will do much to help financially squeezed households. Data show that Australian house sales have fallen, as have house prices, and retail sales have fared little better.
Lower interest rates are often a tool used to steer inflation and the Australian central bank may not have been as willing to cut rates had the inflation rate not come down in recent months. Keeping consumer prices under control remains a top priority for the central bank and so it will be interesting to see the impact that these rate cuts will have on the Australian economy.
Articles
Australia cenbank surprises with aggressive half point rate cut Reuters, Wayne Cole (1/5/12)
Australia cuts rates by than forecast to 3.75% BBC News (1/5/12)
Banks unlikely to pass on full rate cut The Australian, Wall Street Journal, Peter Trute (1/5/12)
Australia cuts rate to support economy Financial Times, Neil Hume (1/5/12)
Australia slashes interest rates by 0.5pc to boost economy The Telegraph (1/5/12)
Australia cuts interest rates as economy slows Guardian, Phillip Inman (1/5/12)
Banks must pass on rate cut: businesses Sydney Morning Herald, Ehssan Veiszadeh (1/5/12)
Bond prices rally after rate cut Sydney Morning Herald (1/5/12)
Surplus remains appropriate: Swan Sydney Morning Herald, Colin Brinsden (1/5/12)
Webcasts
Reserve Bank of Australia Cuts Rates by 50 Basis Points to 3.75% CNBC video, Lauren Rosborough (1/5/12)
Further `Modest’ RBA Easing Possible, ANZ Says Bloomberg, Tony Morriss (1/5/12)
Australia’s central bank shifts focus to growth BBC News, Duncan Kennedy (1/5/12)
Questions
- Which factors will a central bank consider when setting interest rates?
- Explain the components of aggregate demand that will be affected by a lower rate of interest.
- Using diagrams to illustrate the process, explain both the interest-rate and the exchange-rate transmission mechanisms of the fall in interest rates.
- How are interest rates used to target inflation?
- How will lower rates of interest help the Australian economy recover from weakening global economic conditions?
- Why are Australia’s banks unlikely to pass on the full rate cut to consumers?
- Why did bond prices rise and the Australian dollar depreciate after the rate cut? Why does this suggest that a 0.5% cut was greater than anticpated by markets?
Binge drinking is a problem that has seen much attention, especially with regards to minimum price controls. However, in this blog, we consider attention in this sector concerning taxation on beer.
Alcohol is widely considered to be a de-merit good with negative externalities imposing external costs on society. This is one of the reasons why taxes are imposed on alcoholic beverages. By increasing production costs to the firms providing these drinks, prices rise and hence the policy aims to discourage consumption.
During the recession, many businesses have seen demand fall and one sector hit particularly hard because of this and very high tax rates has been the local pub community. Duty on beer has increased since 2008 by some 42%. As such, many rural and suburban communities have seen their local watering holes close down and this has led to a campaign by CAMRA to force a debate in Parliament, as a means of protecting ‘one of Britain’s oldest and best loved institutions’. Data suggests that 12 pubs per week are closing down, thus the future of the industry is now under threat. This may also have further damaging effects on local communities, as it may adversely affect the social aspect of communities. Camra’s Chief Executive, Mike Benner said:
‘Whether situated in a small village, city high street, or on the edge of a housing estate, pubs are so central to our society that whole communities can grow around a particular pub.’
According to a study, pubs in Lancashire and the West Midlands have been hardest hit by the pub closures. If pubs don’t pass the tax increase on to consumers in the form of higher prices, then they must bear the burden. If they do pass the tax rises on to consumers then the larger chain firms can increase their market share by selling at a lower price. They are also facing growing pressure from the supermarket industry, which are able to sell cheap alcohol, also contributing to going to the pub becoming an ‘unaffordable activity’. The following articles consider this industry.
Pub closures spark beer tax plea The Press Association (30/4/12)
A dozen pubs close each week Telegraph, James Hall (30/4/12)
Calls for beer tax rethink as 12 pubs shut every week BBC Radio 1, News Beat, Steve Holden (30/4/12)
Pubs in the West Midlands hit hardest by pub closures ITV News (30/4/12)
Questions
- Illustrate the effect of a tax being imposed on a product such as beer.
- In this market, would the tax be more likely to be borne by the producers or consumers? Explain your answer and illustrate on the previous diagram why this is the case.
- Why are supermarkets able to compete local pubs out of the alcohol market? Do you think a minimum price will have any effect?
- What is a de-merit good? Illustrate the concept of a negative externality on a diagram.
- Explain how a de-merit good causes the market to fail. To what extent does the tax on beer solve the market failure?
- Why are there likely to be adverse effects on local communities? Could this have an adverse effect on economic activity in the area?
John Von Neumann was a mathematician and one of his many accolades was applying mathematics and his observations of traditional games to create a new discipline – Game Theory. This involves a mathematical approach to decision making whereby different strategies can be assessed. It a tool that not only can be used in Economics, but also can be applied to a broad range of areas and fields of study.
