Game Theory and the Herbal Product Industry
In this paper, two researchers discuss the application of game theory in agricultural economics, and more specifically the herbal product industry. To preface what the paper is about, the agricultural traceability system is what makes the supply chain transparent, which is crucial to practically each entity involved in the process. Just as important is the scale of the tea market, with a value estimated at $60 billion USD in the world. Game theory is used to analyze the traceability system used by the herbal product industry in order to explain the strategic choices that government authorities, farmers, certification agencies, and consumers make. Due to the complex nature of analyzing this system, game theory serves as an unexpected tool in such an arbitrary industry. The level of intricacy of the system surprised me, and to give a taste of what kinds of aspects the researchers considered, here are a couple of the many challenges that they mentioned: information complexity and information asymmetry. Information complexity is due to the fact that agricultural products may be sourced from many suppliers, and information asymmetry is from how sellers are likely to overemphasize characteristics of high-quality products and vice versa for low-quality products to mislead consumers.
Now, we can proceed to define the “game” that makes this paper highly relevant to the course. The entities in the supply chain mentioned before are essentially the players. First, government authorities can decide to actively or passively support a traceability system. Farmers can decide to develop a traceability system. Certification agencies decide whether act independently or collude with farmers to issue false certifications for products that are labelled as “traceable agricultural products.” And last but not least, consumers decide whether or not to purchase herbal products. Just as we learned in class about finding Nash Equilibrium, which is finding dominant strategies for every player in the game, the researchers conclude from their analysis that a “superior equilibrium” exists.
What they found wasn’t actually too surprising, but it was the sure manner in which they analyzed the game that was pretty interesting. They set up equations to represent a specific combination of strategies, and evaluated the costs of each, which is essentially what we’ve learned in class to evaluate payoffs. And finally, the result: the equilibrium is that the government authorities should actively promote the system, farmers should develop a comprehensive system, certification agencies should maintain independence, and consumers should continue to purchase herbal products.
Source: https://www.agriculturejournals.cz/publicFiles/102_2018-AGRICECON.pdf