Tuesday, September 3, 2013

What Can Monopoly Teach Us About Economics?

Monopoly is a game made familiar to many of us as children; and, as a game of property and trade, it is natural to consider what economic lessons it might teach. It is fairly evident that the objective of the game - to own all property on the board by raising rents on captive, choiceless consumers - does not represent any sort of market economy. This has been well-documented elsewhere, and for a more complete discussion of the economic faults of the game, I would direct you to those sources. 

However, this is not to say that there are no elements of the game that can teach us valid economic lessons, whether directly or indirectly. Economists should not disregard these lessons simply because the broader game economy is unrealistic or does not align with their views. Here are a few things Monopoly can teach us.

1. Inflation, and its consequences. The game uses a central bank which issues currency, and like the post Bretton Woods central banks, it may issue an unlimited supply of currency. Inflation is naturally introduced by the "Go!" space, which players receive $200 just for passing by. Free money, how nice of them!

Like inflation in the actual economy, however, the return on investment for the new money tends to go towards the players with the most property (assets) at the time the new money is introduced. Inflation makes it easier for players to afford property development, which raises rents (prices) for other players. Naturally, this helps the players with properties to develop. Consider this quote from The Economist regarding recent British inflation:

"The richest only spend around half their income, so consumer inflation only affects that portion; they have more of their savings in equities and property, asset classes that are better protected against inflation, than on the cash deposits which middle-income savers might depend on for the bulk of their interest income." (emphasis added)
Inflation is therefore one of the main drivers of the game's innocuous beginning stages towards the latter stages; it magnifies the luck that players receive early on in the game and tends to (on average) increase the wealth gap between players.

2. First-mover advantage. At the beginning of the game, the board is a blank slate - all properties are available for purchase by the first player to land on them. Might not the order in which the players take their turns affect the outcome of the game, then? According to this analysis of 1,000 simulations, the answer was yes:

"This analysis clearly shows that the relative market share per player is directly influenced by their ordering during the game (Fig. 1). In fact, you can expect to lose 5% relative market share for every player between you and the first player to roll, regardless of the number of players in the game." 

3. Deadweight loss of taxation. Unlike governments which claim to use tax revenue for investment, infrastructure, and so forth, Monopoly operates under no such pretense: tax revenue is returned to the bank and is effectively just taken out of circulation. Thus, in this simple case, all taxation represents a deadweight loss which can no longer be used to develop property, pay rents, or buy new property (insofar as you consider these things "productive", anyway).

This is not meant to imply about anything about taxation outside the game, but it is useful in conceptualizing a deadweight loss for other economic applications.

4. Winner's curse of auction. Perhaps you haven't often encountered auctions in your play of Monopoly, but the rules do allow for a player to commit a property to auction among all players, rather than purchasing it at the listed game price. Auctions are of interest in behavioral and experimental economics, which often have found that individuals do not act rationally in such situations, but rather are subject to cognitive biases.

One complication is that players may reasonably value the property up for auction differently: A player with two orange properties may value the third much higher than the other players, which would substantially alter the optimal bid strategy for each player. Additionally, there are a seemingly endless combination of game states and properties that could be up for auction. However, this could be overcome with the use of simulations, to find the expected value of a property for each player under a given situation (by simulating outcomes before and after the auction assuming each player wins), then testing it against actual bids in that situation. Unfortunately, there seems to be no historical game data to test on; if such data does exist, I would be grateful to any reader who can point me towards it.

Perhaps there are others; this is surely not an exhaustive list. These are the elements of the game I found which most clearly demonstrate economic theory. Just don't ask Uncle Pennybags to draw supply and demand curves.

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