(originally published on LinkedIn on November 3, 2020)
Soooo… my first-ever radio appearance was on the Seeds podcast run by Steven Moe. I felt awkward, we had to do a second take, but it was also exhilarating and cool, and I enjoyed sharing my story. In a way, it was a major part of an inspiration for my setting up Business Games. I wrote a companion article to the episode—it first appeared on LinkedIn, reposted (almost) verbatim below—that feels like it could be a useful foray into the topics that we’ll cover in the Business Games.
Thank you very much to Steven Moe for having me and to the audience for listening!
There were several topics we touched on in the podcast that I thought it would be of use to provide a bit more information for people to follow up.
2020 has highlighted the need to master uncertainty—and in the complex system that is human interactions (be it politics or business or community relationships or social enterprise or anything else), where actions of some actors interact with the choices facing other actors, it is critical to have the tools to be able to analyze strategic decisions under uncertainty.
Below is an intro into, or a refresher of, some such tools.
Note, I finish every section with a variation of “this could be an article/book on its own, but there is not enough space”, and if I don’t I should. It is true in every case. This was always going to be an intro/teaser, and there will be more in-depth articles to come.
The Efficiency of the Markets and Market Failure
The elegantly mathematical perfect competition leads to the most optimal outcome. But perfect competition exists under these 6 assumptions (https://www.investopedia.com/terms/p/perfectcompetition.asp):
The assumptions of perfect competition:
1. All firms sell an identical product (the product is a “commodity” or “homogeneous”).
2. All firms are price takers (they cannot influence the market price of their product).
3. Market share has no influence on prices.
4. Buyers have complete or “perfect” information—in the past, present and future—about the product being sold and the prices charged by each firm.
5. Resources for such labour are perfectly mobile.
6. Firms can enter or exit the market without cost.
The work of many a Nobel winner has shown how relaxing any of these assumptions leads to market failure—a situation when the market delivers a sub-optimal outcome, meaning it is possible to generate more value for somebody in the market while not making anyone worse off.
From Wikipedia on Market Failure:
Market failures are often associated with public goods, time-inconsistent preferences, information asymmetries, non-competitive markets, principal–agent problems, or externalities.
In my opinion, basically, every single real-world market is subject to market failure.