Fifth Element of Game Theory Essay Example for Free

Fifth Element of Game Theory Essay As each of the competing companies watchfully study the moves made by the others in the same industry they all belong to, they sometimes end up deciding to just do the best they can to win the biggest share in the market – without spending more time focusing of the others. This direction, when taken by the industry players, results to the occurrence of â€Å"Nash equilibrium. † (Economics 11th Edition by Richard G. Lipsey Paul N. Courant, UK: HarperCollins College Publishers, 1996) The above graph illustrates the Nash equilibrium and the optimum result that it leads to (Osborne, An Introduction to Game Theory). As opposed to how badly things may end up for the competing players, Nash equilibrium brings in profitable results for everybody. As opposed to getting stuck with the â€Å"prisoner’s dilemma† or the â€Å"pride game†, companies in this scenario have individually opted to stick to the strategies that they believe will work and will hand them the market dominance that will secure their place as the industry leader. Effects of Equilibrium Equilibrium brings balance to the economy – whether long- or short-lived. As a temporary phase that may or may not be maintained, equilibrium occurs when there is no tendency for change in the decisions of the economic entities regarding their products and services, the price and volume that they will supply, and the demand segment that they will target. (Lipsey Courant 510) Equilibrium comes in different forms as prevailing circumstances vary. â€Å"In the macroeconomic goods market, equilibrium occurs when planned aggregate expenditure is equal to aggregate output. † Thus, the volume that the suppliers has made available in the market is the same volume that buyers will actually buy. Meanwhile, equilibrium in the financial markets is attained when the supply of money is equal to the demand for money (Case Fair 67). In this setting, qualified borrowers find that there are loans that they can avail. In the same setting, financial institutions are able to use in their operations the idle cash in their coffers – they issue loans to maximize their income from lending activities. Equilibrium has been thoroughly explored as a concept and has been attributed with all kinds of applications arising from distinct circumstances and conclusions. It is not surprising that there evolved a specialized branch of game theory called â€Å"General Equilibrium Theory† which is widely used in analyzing the public and private sectors of the economy. (David Levine website) Freddie Mac in the Game Theory Freddie Mac never had to ward off many competitors in the industry. As one of the two giants –the other one being Fannie Mae – serving the country’s secondary mortgage market, the gaming area has turned out to be definitely spacious. Indeed, there is the entire USA as the territory to be serviced and there come the banks to take care of dealing with them – then there come Freddie Mac, Fanny Mae and Ginny to pour in the needed financial resources. With Freddie Mac and Fannie Mae issuing or guaranteeing a total of $5. 4 trillion in outstanding mortgage debt, these two companies practically make up the entire mortgage industry. Furthermore, they are equipped with all the needed ammunition for winning: Fannie Mae and Freddie Mac have indisputable strong points. Due to the implied backing of the United States government, they enjoy virtually unlimited access to the capital markets at funding costs that are below market. They pay no local taxes, only national. Each has enjoyed tremendous growth and profitability. As the biggest issuers of mortgage-backed securities and corporate securities in the world, the biggest buyers and hedgers of the securities in the world, and, not least, the source of liquidity for more than 75% of conventional and conforming home mortgages extended in this country, it could be argued that Fannie Mae and Freddie Mac are about as central to the American capital markets as the Treasury Department. (Annaly webstie) (Source: World Socialist website) Indeed, with their coveted roles as providers of a continuing supply of money for the banking institutions engaged in retail lending to the multitudes, Freddie Mac and Fannie Mae own the game. As competitors offering the same products and services, enjoying the same rare privileges and dealing with the same clients, Freddie Mac and Fannie May have consistently been like identical twins – though Fannie May turns out to be decades older than Freddie Mac. With each one of them keen on beating the other, the strategies and packages they resorted to turned out to work for both of them, at least during the booming growth years of the industry. Consistent with the Nash equilibrium concept, a report that came out in the Spring of 2002 showed that fully one-half of 2002’s 1. 2% gain in real GDP growth was brought on by the housing activities across the country. (Annaly website) Freddie Mac and Fannie May have been playing the Nash Equilibrium game. In such a game as theirs, â€Å"players play the best they can given their beliefs, and they have learned all there is to learn about their opponent’s play† (David Levine website). Works Cited Osborne, Martin. An Introduction to Game Theory. Oxford University Press, 2002. Lipsey, Richard Courant, Paul. Economics 11th Edition. New York: HarperCollins College Publishers, 1996. Case, Karl Fair, Ray. Principles of Economics 8th Edition. Prentice Hall, 2007. Levine, David. What is Game Theory? Department of Economic, UCLA. 29 October 2008 http://levine. sscnet. ucla. edu/general/whatis. htm#General%20equilibrium%20theory Annaly. com Website. FAQs on Fannie Mae and Freddie Mac, 29 October 2008 http://www. annaly. com/ie/ffmfaq. html World Socialist Web Site. The Importance of Fannie Mae and Freddie Mac. 29 October 2008 http://www. wsws. org/articles/2008/jul2008/debt-j25. shtml