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Ivy League Games

Feb 26, 2011 • Businesses, Demand, Supply, and Markets • 149 Views    No Comments

Joining Harvard and the multitudes they hoped would follow, in 2006, Princeton eliminated its early admissions option. Now, with Harvard and the University of Virginia, Princeton has said it will return to early admissions because few followed.

The Economic Lesson

I wonder whether we can explain both decisions through game theory. First, let’s call the market structure within which Ivy League schools compete, an oligopoly. With few market participants on the supply side, a “price making” capability (admissions standards), and difficult entry and exit (colleges neither leave nor enter the Ivy League), schools typically wield considerable power.

Also, as oligopolies, they engage in game theory. Here is how it works. The two firms (or schools) know that, to some extent, they are interdependent; one school’s decisions affect the other school. Consequently, each one tries to predict what the other will do.

The result is a behavioral matrix called the prisoners’ dilemma. Imagine a square divided into quarters. For example, above the left quarter is Princeton/no early admission. Above the right quarter is Princeton/early admission. To the left of the upper quarter is Penn/no early admission. To the left of the lower quarter is Penn/early admission.

You can fill in the matrix. Where Princeton/no early admission and Penn/no early admission converge, we could say that equal numbers of students apply. However, what happens when they converge with one school not doing it and the other proceeding? What if neither proceeds?

As you can see here, the prisoners’ dilemma conveys the pros and cons of unilateral behavior and of collusion. The problem, as Princeton discovered, is that market participants cannot guarantee competitors’ behavior.

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