Strategic Behavior
Strategic Behavior
In economics, the term strategic behavior usually refers to decision-making that takes into account the actions and reactions of other economic agents. Its essential feature is the recognition of the direct interdependence between one’s behavior and that of others.
The difference between strategic and nonstrategic behavior can be highlighted by the following example: Suppose a consumer enters a store and encounters a product with a particular marked price. This consumer’s decision to buy or not buy the product depends solely on their preference for the product. On the other hand, suppose the store allows bargaining. In this case, the price for the product is not fixed, but depends rather on the process of negotiation between the buyer and the seller. In this process of negotiation and purchase, the consumer presumably not only takes into account their own likes and dislikes for the product, but also tries to anticipate such factors as the lowest price the seller would be willing to accept. Whereas in the first situation personal preference is the only factor influencing the consumer’s decision, in the latter case the consumer also has to take into account the seller’s behavior in deciding what offer to make or accept and consequently whether to buy or not. This latter process is an example of strategic behavior.
In economics, the first formal discussion of the concept of strategic behavior is believed to be in Augustin Cournot’s 1838 book Recherches sur les principes mathématiques de la théorie des richesses (published in English as Researches into the Mathematical Principles of the Theory of Wealth ). In a chapter on the competition between producers, Cournot considers how each producer, when making output decisions, takes into account the impact their own output and that of other producers has on the market price and thereby on profits.
The concept of strategic behavior is now recognized in many diverse academic fields, ranging from economics and business to politics and international relations. In the present day, a counterpart of Cournot’s above-mentioned example with an impact on our day-to-day life is competition between producers of oil. There are only a handful of big oil-producing countries in the world, and in deciding whether to increase or reduce production, each takes into account the impact of their decision on the price of oil in the global market and consequently on their own revenues. R&D races, bidding in auctions, trust in societies, contracts, and social insurance are a few of the many prominent applications of the concept in economics and business. Strategic voting and the formulation of election platforms are two examples of strategic behavior in politics, while in international relations, strategic behavior is found in arms races, trade, and in negotiations between nations. The outcome of interaction between the strategic behaviors of a set of agents is a subject examined by game theory.
SEE ALSO Competition, Imperfect; Game Theory; Strategic Games; Strategy and Voting Games
BIBLIOGRAPHY
Cournot, Augustin A. 1838. Recherches sur les principes mathématiques de la théorie des richesses. Paris: Hachette. Published in an English translation by Nathaniel T. Bacon as Researches into the Mathematical Principles of the Theory of Wealth (New York: Macmillan, 1927).
Sumon Majumdar