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Game Theory and Empirical

Approaches. (New IO)

Dhiratara Pradipta Narendra
Universitas Indonesia
Economy has a broad definition. Economy could be defined as a science that learn

the behavior of the market. It could also be defined as a human action in particular with the

relation of the scarce resources. Economic often use a quantitative approach to measure all of

the outcomes they would expect from a strategy.

In the economy, there will be different sectors that focuses on different things.

Industrial economics is one of the sector that determines not only the profitability of the

industry but also the approach that the firms should take in order to succeed in that particular

industry. With the help of the industrial economic science, industries especially firms or any

other parties, could choose the best possible outcome they expected.

Game Theory

Game Theory defined as a set of science of strategy in which aimed at decision

making in a competitive situation and conflicts under a specified rule. Game theory could be

applied in many different situations such as a prisoner dilemma, oligopoly market, and others.

In the game theory, there will be different situations that will likely occurs and

describe in different types of the game theory. A perfect information type occurs when both of

the players has already had the perfect information among each other. A dominating type

form of game theory is whenever one of the player could have a dominant strategy in which

one of them become worse off and the other always become better off regardless what the

other done. There also a zero-sum game form of the game theory. This form happens in which

all of the players have no advantages from all of moves they make. The sum-payoffs to all

player is zero.

However, In the game theory all of the players could be better of if they could meet

the Nash equilibrium. The Nash equilibrium happens whenever the players recommends

strategy to the other player and thus each player cannot improve by the payoffs unilaterally.
In the Nash equilbrirum, each player asummed rational and follows the recommendation

from the other player.

New Empirical Approaches

The new empirical approach defines some of techniques that have been used to

estimate the profitability of the industry. Before the new empirical approach developed, there

was a time when economist use the old empirical approach. Although both of them are

measures the profitability of an industry, the old and the new empirical approach has different

techniques to count the degree of profit. Difference between the old empirical approach in

which the old empirical approach draw conclusions based on the structure of the industry and

their profitability.

The new empirical approach focuses on the econometrics testing of particular aspects

conduct in single industries with the objective of detecting market power or changes in the

collusive-competition behavior of the firms1. This approach could give a structural model that

provide the theoretical analysis about how firms will behave under a different market


This approach use a tailored economic model for the industry which is being used. Thus, the

economic model is closely tied to the econometrics. The new empirical approach analyses

individual industries among the various types of industries. This approach has been applied

into various types of industries such as the automobiles, rubber, textile, electrical machinery,

tobacco, food processing, banks, coffee, aluminum, retail gasolines, soft drinks, and long

distance telephony2.

Compare and Contrast

1 Bresnahan and Schmalenesee (1987)

2 Bresnahan (1989)
Both the game theory and the new empirical approach has similarities and differences.

The game theory and the new empirical approach both could be applied in various industries

regardless of the types. Another similarities might be the probability of collusion that could

be occur in both of the approach. The differences between both of them is the number of the

industry. The game theory could only be applied on the duopoly market, while the new

empirical approach could be applied on the industries that have several firms. Another

difference between game theory and new empirical approach is the mathematical approach.

The game theory use the basic mathematical calculation to understand the risk and the

opportunity of the strategy. While the new empirical approach use the economic modeling

and econometrics to understand the profitability and opportunity of that particular industry.