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Spotlight on Economics: Game Theory

Game theory is used as a tool for economic analysis.

By Jeremy Jackson, Economics Assistant Professor

NDSU Agribusiness and Applied Economics Department

I'm a microeconomist by training and use the economic theory of games throughout most of my research program.

Game theory is used as a tool for economic analysis whenever two or more players (people, firms, governments, etc.) take actions that affect themselves and the other players. This means that the actions of the players are strategically intertwined.

In this column, I will detail projects using my training in the economic theory of games that are of interest to agriculture.

Joint work with Joleen Hadrich, agribusiness farm management assistant professor, uses the tools of game theory to explore the effects of environmental regulation on methane emissions in the dairy industry. A dairy farm can choose different technologies to abate methane emissions that range from hauling manure on a daily basis to adopting anaerobic digesters.

The choice of abatement technology also impacts a farm’s cost structure for milk production. In the game, dairy farms can influence the policy decisions of regulators through their abatement decisions as regulators choose a tax rate to charge per ton of methane emissions emitted.

The government chooses its policy to balance the interests of the various interest groups at play. For example, the environmental lobby wants to minimize environmental damages, the dairy industry wants to maximize profits and the government has an interest in the form of tax revenues.

Preliminary results suggest that the regulation of methane emissions will change the size structure of the dairy industry. This will cause small farms to consolidate into larger operations that can adopt the most effective and most expensive abatement technology, which are anaerobic digesters.

Work with Jason Smith from Utah State University looks at the complex world of intellectual property rights and the buying or selling of research use licensing. The theoretical modeling focuses on the interaction of firms as they buy or sell licenses to each other. This allows them to use the technology of other firms in their own research and development process.

The problem for a firm selling a use license to another organization is that the purchasing firm may be able to innovate and further dominate the market. This could lead to lower profits for the selling firm. Therefore, if a license is to be sold, it must be priced in such a way that the selling firm is compensated for the risk of losing profits. However, the price also must be set so that the buying firm is willing to pay the price for the increased chances of profits from increased technological development.

Applied work with Bill Wilson and Bruce Dahl in our department will take the theoretical framework and use it to analyze the market for wheat seed and the germplasm used to create new strains.

Lastly, work with Ryan Larsen, assistant professor in the department, will examine the shift of agricultural lending practices away from an informal relationship and contracting with a loan officer to a more detailed and formal contractual agreement.

Game theory is able to explain the evolution of agricultural lending institutions and shows how the advances in technology and information gathering are changing agribusiness practices.

NDSU Agriculture Communication – July 3, 2012

Source:Jeremy Jackson, (701) 231-7832, jeremy.jackson@ndsu.edu
Editor:Rich Mattern, (701) 231-6136, richard.mattern@ndsu.edu
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