Friday, December 11, 2009

Formula 1 and Nash equilibrium

A selection of strategies by a group of agents is said to be in a Nash equilibrium if each agent's strategy is a best-response to the strategies chosen by the other players. By best-response, we mean that no individual can improve her payoff by switching strategies unless at least one other individual switches strategies as well. This need not mean that the payoffs to each individual are optimal in a Nash equilibrium: indeed, one of the disturbing facts of the prisoner's dilemma is that the only Nash equilibrium of the game--when both agents defect--is suboptimal. (Evolutionary Game theory, Stanford Encyclopedia of Philosophy).

The technological arms race in Formula 1 now appears to be dead. The technical regulations have been converging to a control formula for some years, with little opportunity for variation in engine or chassis design, and in the light of the limited financial resources now available to the surviving F1 teams, their optimal strategies include voluntary mutual agreements to limit expenditure on testing, research and development. The teams have even agreed to a common car launch in Valencia next year to save costs.

In the lexicon of game theory, the constraints upon the game players have changed, with the consequence that one state of Nash equilibrium (the arms race) has been supplanted by a new state of Nash equilibrium.

This new state of Nash equilibrium is highly preferable for those who own the commercial rights to Formula 1, (currently the private equity company CVC). Formula 1 has now essentially become a package of revenue streams: television broadcasting rights, circuit hosting rights, circuit advertising, and paddock hospitality. The arms race was bad for the commercial owners of F1 because it made for larger performance gaps between the cars, and therefore a less attractive product to sell to the television companies. It also meant that the manufacturers funding that arms race developed an interest in acquiring a larger stake of the commercial revenues generated by the sport, and a greater influence over its governance. With the shrivelling influence and spending capacity of the remaining manufacturer teams, that threat to the business plan of Formula 1 has been eliminated.

1 comment:

Sean said...

Thats just a reflection of life as it is at the moment.

The Eu is a good example of this, the pols are working to try and eliminate risk, through the bigger is better maxim, pooling power, pooling risk ect.

And just as in the Banking crisis, they will not be reducing risk they will be increasing it, the big risk for F1 is they take away the dynamism of engineering, competition which is the real spectacle.

The big risk in the emerging geopolitics of the world, is less small wars but when these giants do go to war they will be big ones.

And its big business that benefits till then having the pols in your pocket and the democratic system neutered as to be ineffective.

both systems to me to be making the same mistake of not understanding the risks they are running, hey think they are creating something strong, but they are not.