Econ students, this is Mr. Clifford. Welcome to Econ Movies. Today we're going to look at the economics in Batman.
No, no, wait. We're going to look at The Dark Knight. This movie actually has some great economic advice. If you're good at something, never do it for free. Now, we're still talking about microeconomics, and this time we're going to talk about oligopolies.
An oligopoly is when an industry is controlled by a few large producers. For example, the wireless cell phone market in the United States is controlled by four main firms. Verizon, AT&T, Sprint, and T-Mobile.
Competition between these firms keeps prices down, but what if they got together to set prices high so they could all make more profit? This is called collusion. Now, this is illegal in the United States, and so there's two words to describe collusion.
Unethical. Dangerous. Firms in an oligopoly are interdependent.
This means that their decisions will directly affect their competitors, so they have to be aware of how their competitors will respond. So to maximize profit, these firms have to use game theory, which is the study of strategy. This movie includes a great, but rather violent example of game theory.
Tonight you're all going to be a part of a social experiment. I'm ready right now to blow you all sky high. And to get off their boat.
You all die. Each of you has a remote to blow off the other boat. If, however, one of you presses the button, I'll let that boat live. So, who's it gonna be? Just in case you haven't seen the movie...
Spoiler alert! Let's talk about the classic example of game theory, the prisoner's dilemma. Assume two people were arrested, charged with a crime, and put in two different cells. Oh my head!
Oh! Everything's fuzzy! AAAAAAAAHHHHH! Who punches a hand? Prisoner 1 and Prisoner 2 have only two choices.
They can either deny or they can confess to the crime. This means that there's only four possible outcomes that can occur. If they both deny, there's enough evidence to put them in jail for 10 years each.
When reading these things, the numbers on the left are Prisoner 1 and the numbers on the right are Prisoner 2. I color-coded them to help you better see this. If they both confess to the crime, they're both going to go to jail for 20 years. But if Prisoner 1 confesses and Prisoner 2 confesses, two denies, prisoner one is basically going to rat out prisoner two. And so prisoner one is going to go free and prisoner two is going to go to jail for 30 years. Now over here, if prisoner one denies and prisoner two confesses, prisoner two goes home free and prisoner one goes to jail for 30 years.
So what are they going to choose? Well, that's the point of game theory. Before you can make a choice, you have to keep in mind what the other person is going to do. Now this is a good way to introduce the idea of game theory, but let's look at a better example that has firms and profits. As you probably know, Batman started as a comic book character.
What you might not know is that the comic book industry today is an oligopoly. Marvel Comics has about 37% market shares and DC Comics, the creators of Batman, have about 31% market shares. Like most oligopolies, the end product is sometimes very similar because they're trying to find what customers want and they steal ideas from each other. So think of the story of Batman. A handsome billionaire that drives fast cars and hangs out with beautiful women has a life-changing experience.
and inspires him to fight evil despite having no superpowers, so instead he has to rely on gadgets and a special suit to fight terrorists. Aided by his trusted butler, he is betrayed by a mentor, defeats a bunch of bad guys, and becomes a beloved hero. This story sounds familiar. Anyways, since the comic book industry is an oligopoly and is controlled by a few large firms, they have to use game theory. So let's say that DC Comics and Marvel Comics are deciding whether or not they should make a new comic book series covering the backstories of famous butlers or villains.
DC is deciding whether they should have a series about Alfred or a series about Joker. A long time ago I was in Burma my friends and I were working for the local government. They were trying to buy the loyalty of tribal leaders by bribing them with precious stones. Marvel is deciding between making a comic book about Jarvis or the Mandarin.
Assume each company can make either one or the other and so the result is this game theory matrix. This shows the profit that each firm would get in each of these different situations. Let's just keep it simple by having really low numbers. To verify that you know how to read this thing let me ask you a quick question. If DC decides to make a comic book about Alfred and Marvel does one about the Mandarin how much profit will Marvel get?
The answer is $200. Now that you can read the chart, let's talk about something called a dominant strategy. If you have a dominant strategy, that means you should make that choice no matter what.
In other words, it doesn't matter what the other person does. You should definitely choose that option. So let's see if DC has a dominant strategy.
Now, if Marvel decides to go with Jarvis, DC can choose between doing Alfred and getting $100 or going with Joker and getting $500. Which one would DC rather have? Well, they'd rather have $500, and so they're going to do a comic book about the Joker. If Marvel chooses the Mandarin, again, DC would choose to do a comic book about the Joker. That means that that option is their dominant strategy.
With these numbers, there's no reason for them ever to make a comic book about Alfred. Sorry, Alfred. Now let's see if Marvel has a dominant strategy. If DC chooses Alfred, Marvel can choose between doing a comic book about Jarvis and getting $300, or doing one about Mandarin and getting $200. Marvel would choose Jarvis.
If DC chooses the Joker, Marvel can choose between doing Jarvis and getting $50 or doing a comic book about the Mandarin and getting $300. They would choose the Mandarin. So depending on what DC chooses, Marvel might choose Jarvis or they might choose the Mandarin.
This means they do not have a dominant strategy. Now if this was realistic and the firms did have all this perfect information, where would the firms end up? Well, DC would obviously choose the Joker because that's their dominant strategy, and Marvel would choose to do the Mandarin because that will give them the most profit.
This is the idea of something called a Nash Equilibrium. It's the end result that we'll be at when each firm makes choices to maximize their own profit, but also keeps in mind what the other firm is going to do. Reading a game theory matrix and finding the different dominant strategies will take time and practice, so be patient.
Dominant strategies are not that hard to find. Seriously, just calm down look at the game three matrix and you'll figure it out Seriously, dude, just relax We are going to pull off the true crime of the century We are going to steal the moon!