Wolfram Elsner

Introduction to the Microeconomics of Complex Economies

This is an introduction to direct interdependence among agents and resulting complexity microeconomics for first- and second-semester levels. It introduces to more or less complex multipersonal decision structures and sorts them after degrees of conflict. It explains basic perspectives on the microfoundations of coordination, the invisible-hand and the fallacy-of-aggregation paradigms. It explains rationality under conditions of strategic uncertainty, characterizes resulting processes as path-dependent, nonergodic, cumulative, and open-ended change, with multiple equilibria. Furthermore, it introduces social rules and institutions as solutions of repeated coordination and social dilemma games, respectively, i.e., not only rationally adopted but also partly habituated and semiconsciously applied, as long as conditions remain the same and no surprise warrants a change of strategy. Coordination and dilemma problems and rules and institutions are introduced as systems of externalities with a public good character. Finally, institutions are explained as instrumental (problem-solving) devices and also as potentially degenerated, i.e., ceremonially warranted behavioral lock-ins.

The Ideal Neoclassical Market and General Equilibrium

This chapter presents the core of neoclassical economic theory, the polypolistic competition model. The calculation of optimal consumer decisions is explained, as is the optimal calculation for companies. Partial market equilibrium and general equilibrium conditions are shown. The conditions for the general equilibrium to exist as a unique and stable equilibrium are described. Some further developments such as intertemporal optimizations are explained. Finally, some extensions in models are shown that include some slight modifications of assumptions, which result in at times substantial differences in results.

Tools II: More Formal Concepts of Game Theory and Evolutionary Game Theory

This chapter offers a concise formal guide to the major concepts of game theory and evolutionary game theory. It starts with a formal definition, also introducing the underlying assumptions and properties of strategic games as well as common forms of notations: formal notation, normal-form notation, and extensive notation. After some brief considerations on decision theory, the chapter presents one-shot game solution concepts including successive elimination of strictly dominated strategies, the Nash equilibrium, and Nash equilibrium refinements in pure and mixed strategies. Further, sequential games, repeated games, and supergames are introduced. This part of the chapter also offers an introduction to subgame perfectness and the folk theorem. The chapter proceeds with a presentation of the different approaches to evolutionary game theory. This includes evolutionary stable strategies as well as replicator dynamics and a number of important auxiliary techniques such as stability evaluation in dynamic systems. All methods discussed in this chapter are illustrated by numerical examples.

Problem Structures and Processes in Complex Economies

This chapter illustrates a categorization of real-world problem structures using different prototypical games as well as an analysis of basic mechanisms that allow agents to realize improved results in social dilemma situations. The basic problem structures range from social optimum games to dilemma games, with a number of different coordination and anti-coordination games in between. Mechanisms for improving agents’ results include approaches based on formal, game-theoretic formulations as well as real-world considerations focusing on emerging institutions. The game-theoretic formulations allow identifying basic mechanisms that may change the problem structure that agents face, thereby enabling the realization of improved results. Real-world agents need further support for a structured improvement of the outcomes of their actions. This support is lend to them by social institutions in case of dilemmas, and less demanding social rules, stabilizing expectations regarding others’ behavior, in the case of coordination problems.

Tools III: An Introduction to Simulation and Agent-Based Modeling

This chapter gives a brief introduction to the method of computer simulation. It explains the method step by step. This is followed by a section that addresses a number of issues specific to computer simulation including the notation of entities, numbers, time, and randomness and simplicity versus complexity. Further, advantages and disadvantages of simulation as a method are listed and an illustrative example is given. The example—Axelrod’s emergence of cooperation applied to a grid network—is first explained as a theoretical model. Following this, it is shown how this example can be studied in a simulation program. Included is a very short introduction to the programming language Python and a commented reference of introductory guides and textbooks on simulation.

Tools I: An Introduction to Game Theory

This chapter gives a brief and nonformal introduction to game theory. It explains the basic approach, the makeup of a game, and the underlying assumptions. The potential variety of game theory models is illustrated using simple common games such as the prisoners dilemma and the social optimum games. This chapter continues to explain some of the basic concepts of game theory including dominance, best answer strategies, Nash equilibria, and Pareto optima. Finally, the common normal-form notation is introduced and it is explained how to work with it in order to identify best answer strategies, Nash equilibria, and Pareto optima. An outlook is given on more complex games different from normal-form games.

Recent Core Models of Complexity Microeconomics

The chapter gives an overview over recent advances and influential models in evolutionary, institutional, and complexity economics. Some earlier models built on game-theory foundations are presented, starting with A. Sen’s isolation paradox and assurance game, followed by A. Schotter’s, R. Axelrod’s, and K. Lindgren’s approaches to institutional emergence. These are followed by a presentation of models of social segregation by T.C. Schelling and R. Axelrod, and attendance coordination models by T.C. Schelling and W.B. Arthur. The chapter continues with a generalized formalization of coordination failures (R.W. Cooper and A. John) and the original technology choice and lock-in models (W.B. Arthur, P.A. David), before presenting the original neo-Schumpeterian model of technological change (R.R. Nelson and S.G. Winter) and a model of search on technology landscapes (S.A. Kauffman). Then, D.J. Watts and S.H. Strogatz’ small-world networks as well as Barabasi–Albert scale-free networks are introduced. The overview is completed by P.D. Bush’s Veblenian theory and model of institutional change and E. Ostrom’s studies and game-theoretic model of common pool resources.

The Information Economy and the Open-Source Principle

The chapter gives an introduction to the economics of information and knowledge, to the emergence of the IT economy, and to the principle of open source. Recurring to methods introduced in Chapters 2, 8, and 11, this chapter develops a number of specific models to highlight particular issues of the economics of information, IT, and open source. This includes the negligible marginal cost, network externalities, price wars, compatibility (interoperability) management, standard tying, niche creation, as well as software piracy. The questions, how open source works in practice, what motivates open-source programmers, and how open source relates to other parts of the IT economy, are also raised. Further, the chapter presents some consequences for policy. It emphasizes the importance of openness of information for the development of the industry, the specifics of network externalities, of oligopolistic industry structures, and of path-dependent development.