Games of congestion
Some strategic situations exhibit the problem of congestion. This is where a strategy becomes less attractive as more players use it. The classic idea behind congestion is in traffic. If everybody drove down the same road, it’d get too crowded, incentivising some drivers to exit. Conversely, if nobody used that road, it becomes a nice shortcut, inducing new drivers to enter.
Crowding out
Congestion is in stark contrast to tipping, where a strategy becomes more valuable as more players use it. In a previous post, we showed how network effects in business can tip consumers into certain products; and how a critical mass of protestors can trigger a social revolution.
Solutions to games of congestion tend to encourage differentiation and experimentation. If business finds the competitive environment unassailable, they may seek something new. Likewise, an excellent investment strategy might lose its charm if everybody gets the same idea, crowding out the opportunity. Congestion and crowding out is one source of differentiation in business and finance.
Differentiation: Game of Chicken
In this way, congestion, crowding out and differentiation is akin to a Game of Chicken. Your company might like to play in some niche, but competition is mutually assured destruction if everybody plays there too.
Game of Chicken
Lock-in: A Prisoner’s Dilemma
Sometimes, however, players find themselves unable to extricate themselves from congestion problems. The result, in some sense, is a Prisoner’s Dilemma in which each player’s participation makes everybody worse off. A popular example is your choice between Sit or Stand at a concert or sports game. You might get a better view by standing if people are sitting. And you have no choice but to stand if everybody else is standing. Because everybody thinks the same way, everybody stands.
Prisoner’s Dilemma
The game in real life is usually more complicated than this. Social proof is a real phenomenon. An individual may feel uncomfortable to pursue a strategy when everybody else isn’t doing so. Indeed, if everybody is sitting at the opera, you might feel a little odd to stand up for a better view. Some games may exhibit a tension between tipping and congestion.