Retail from a Game Theory Perspective

A divorce lawyer in London has told me that his most-winning strategy is to bore his opponent into submission. This strategy is often underrated. Insurance companies have become masters at impenetrable small print, so that the vast majority of customers sign terms and conditions they have not truly understood. Often we don’t find out just how unfavourable they are until we need to file a claim. The tech giants are no different. Who among us has ever read all the terms and conditions attached to that small box in a dull mass e-mail? At the end of the day, impenetrability is just another barrier which allows someone or something to carry on undisturbed. One should not underestimate this as a defensive strategy. It has been shown to work in evolution – the oddest creatures survive in the most inhospitable depths of the ocean – and it works in business as well. Unfortunately, the world of academia has also been prone to such tendencies, which is unfortunate, given that I believe that the aim of knowledge must surely be to make it as accessible as possible.

?????????????Take game theory, for example. Has it really dawned on most people how fundamentally important this intellectual tool is to understand the times we live in? Have most people realised the importance of Adam Smith’s theory of the invisible hand – which hails the pursuit of self-interest as being the most efficient regulating mechanism in economics – being mathematically proven wrong by John Nash? It actually took the fall of communism before Nash got the recognition for this with the Nobel Prize. After all, it was politically risky to to support any collectivist thinking before that; anything which smacked of the slightest challenge to the primacy of the untramelled free market was best left in the intellectual doldrums. But Nash got his recognition in the end for proving that co-ordinated co-operation can beat the universal pursuit of self-interest above all. The implications for neo-liberalism in its current form are obvious. It’s just a shame that this knowledge is contained within the narrow academic field of game theory, because the consequences of making it more accessible in daily official discourse could give us enormous societal progress. I think of it as intellectual blockchain.

?????????????If we remove the dry technicality from game theory and try to approach it with common sense, its conclusions become obvious. Take taxation, for instance: nobody likes to have less disposable income when they can have more. But the day we are unable to fend for ourselves, having had less disposable income before seems decidedly trivial. In other words, the ?second best? option was a worthwhile price to pay in the long run, compared to what may have seemed preferable in the short term. This example will strike most readers as banale, but this only makes it more obvious how slow official discourse has been in adapting the Nobel-prize winning concept that could transform our societies. Old labels of ?left? and ?right? are nearing obsolescence. Game theory lets us rank outcomes according to efficiency and likelihood, and to plan strategies several chess moves ahead. It could facilitate the opposite of partisanship and short-termism.

?????????????I would go so far as to claim that if most people realised the wisdom of game theory, it would become blindingly obvious that the rampant individualism and short-termism of our age is playing on overtime. And it’s not working for most of us. Co-ordinated co-operation is what is needed for our next level of economic evolution. Alone, most of us are powerless in a landscape dominated increasingly by giants.

The Guardian recently wrote about a banker which it described as ?worse than the worst Bond villain?: the man who made it possible to break down the Bretton Woods system. The article used a simple metaphor to describe the system: Imagine an oil tanker. If it has just one huge tank, then the oil can slosh backwards and forwards in ever greater waves, until it destabilises the vessel, which overturns and sinks. With Bretton Woods, the oil was divided between smaller tanks; the liquid could slosh back and forth within its little compartments, but would be unable to achieve enough momentum to damage the integrity of the vessel. With capital restrictions in place, meltdowns like 1929 and 2008 could be prevented. And along came Siegmund Warburg, who invented a system which, as the article wrote, ?set the rich free?. He is credited with inventing offshore banking, which skewed the competitive playing field.

The most commonly known example in game theory is the Prisoner’s Dilemma. In short, two thieves have been caught by the police and are being charged with a theft that the police cannot prove unless one of them rats the other one out. Whoever does so first will get off lighter. If both of them were to steadfastly trust one another, they would both go free. If both tell on each other concurrently, they both go to jail. So it seems as if the interests in the game have been set up to favour non-cooperation as the most rational strategy. Co-operative versus non-cooperative play is the terminology game theory often espouses, unscerscoring my previous point about dry language being a barrier to accessibility. But in its simplest form, game theory can be used to find the win-win spots that produce the highest yielding collective outcomes. Do we co-operate or not? Given that we have the tools to analyse the state of play without ideological labels now, why are we not able to use them more in the official discourse? We should be able to plan several chess moves ahead with the intellectual tools that have been at our disposal for decades.?????????????????????????????????????????????????????????????????????????????????

Let’s go back to Siegmund Warburg. By enabling companies/individuals to have a de facto tax-free system with little or no oversight, he sowed the seeds of a system where 42 individuals can own more than 3,5 billion people. This outcome was as predictable as as the Prisoner’s Dilemma. While offshore banking was a small phenomenon, it is easy to see how it evaded regulations; too small to merit official attention; technicalities too dull for most people to care. But left undisturbed, it has grown into a behemoth whose gravitational power is bending the fabric of our societies. Retail is no different.

One reads about wilting high streets and the urban decay which ensues as a result. How can anyone possibly be surprised by this? The effects of a global logistics system set up to favour global behemoths beyond the reach of taxation were entirely predictable. Here is a mundane example: In Norway, there has been a VAT exemption for goods costing less than 350 NOK being imported into the country. So if a lipstick bought overseas costs 350 NOK, versus the same lipstick with 25% VAT on top being available locally, surely the outcome is given. Even more so if the postage is subsidised.

Can one expect utility-maximising individuals to pay more, so that their local shops survive? Perhaps not. But should one expect our politicians to foresee that the purveyors of goods which must compete with overseas businesses that pay no taxes might become unemployed? I would say yes. Now, if it was as easy for these purveyors to change careers and thrive as quickly as it is for people to find cheaper goods overseas online, this would purely be an efficiency bonanza for all. But the wilting middle class in the Western world suggests that this is not the case. Profits are privatised, often beyond the reach of taxation, while losses are socialised, i.e. carried by the taxable masses. This is not only hollowing out our tax bases, but the effects on our high streets did not see political ownership for some time. Wilting high streets are sometimes blamed on retailers for not keeping up with the times, as though vast structural issues had nothing to do with their predicament.

Someone benefits from the current state of affairs. Is the distribution of beneficiaries optimal for our societies? We have game theory with which we can analyse the the road ahead and where it leads us if we stay on our current course. Most shops are only open during their customers’ working hours. The internet has liberated people from having to shop within those confines. Some concessions admittedly need to be made for delivery windows or post office trips, but being able to shop outside working hours inexorably leads people online. Add to that the ease of online visibility versus having to find something in the physical world, ever rising rents on commercial properties whose landlords are just pursuing their self-interest, an advertising-based model of information flow, where those with the largest coffers nearly always end up on top, and the unfair tax advantages for huge e-commerce players to boot, and it becomes obvious which way physical retail will go unless counter-forces organise with some serious commercial and political firepower behind them.

International co-operation on taxes seems the furthest way off. That genie has been let out of the bottle. Ditto the taming of real estate prices. But perhaps something can be done to break the advertising model which favours the biggest players disproportionately? What can be done to level the playing field? What if it’s all simply down to convenience?

In game theory terms, one could say that each shopper’s un-cooperative actions against their own local community chips away at their own urban fabric. Saving a few bob will always be an immediate gain, whereas the urban costs of wilting high streets are hard to attribute to individuals. Are people aware that they are clicking away their own communities’ economic sustainability, one click at a time? When enough local retailers have bowed under to global competition, whose tax budget do they land on, before they are able to retrain and be gainfully employed elsewhere? These considerations are really not that many chess moves ahead.

So what is to be done? The short-termist preponderance of wanting to save money and get things delivered to our doors is blinding many to the fact that they are contributing to the wilting of our high streets and urban fabric; to the hollowing out of our tax bases (forcing governments to either raise taxes for the rest of us or to borrow even more), and to unnecessarily high CO2 emissions. Each kilo of goods arriving by airmail emits 30 times as much CO2 as goods ordered by sea transport. Has that been factored into the economic equation? Who pays for this? I suspect nobody. Or rather, everybody. And that means that nothing gets done about it.

Personally, I have always approached this issue from an urban planning perspective. The gigantic capital flows that back the global e-commerce model are not taxed for the negative externalities they create (sometimes they are not taxed at all, actually). And they are monopolising more and more of the information flows through their enormous marketing budgets. The rational course of action for the individual retailer is to surrender, and get in line with the global home delivery models, even if it does mean fewer feet on the ground and wilting high streets. Some will move outside of town and rent cheap spaces to run their webshops from. Many will just throw in the towel. And our cities are losing out on diversity and charm as a result. Even the larger chains are starting to feel the pain; even Fifth Avenue in New York is seing shop closures, which seemed inconceivable only a few years ago. Ownership of our urban fabric is pulverised, and as such no match for the forces which profit from its dilapidation. In the age of extreme individualism, the biggest players can do as they please. Who is to oppose them? Game theory application would reveal this as a highly predictable outcome.??????????????????????????????????????????????????????????????????????????????????????????????????????

With a high concentration of power, the absence of power abuse can sooner be seen as an anomaly than an expected outcome. Would it really be so bad if the e-commerce giants’ retail dominance became complete? Ask the store room workers who have to wear nappies to work because toilet breaks are too expensive for the company to accept. If any entity gets that much power, they tend to use it. That is true for any power constellation, be it political or economic.

Decades of peace and prosperity have allowed a ?live and let live? attitude to become so prevalent that drawbacks of individualism may not have been adequately considered. The bill will arrive after the party. The problem is that once we wake up from our slumber, we may no longer recognise the landscape we fell asleep in. And so I repeat that if most people realised the wisdom of game theory, it would become blindingly obvious that the rampant individualism and short-termism of our age is playing on overtime, with ever fewer beneficiaries. Co-ordinated co-operation is what is needed for our next level of economic evolution. The right technology can help us with that. But the attitude required for the spread of this technology must come from our heads. Are we ready for that? And if not, are we ready for the consequences? They are predictable. And not that many chess moves ahead.