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Will Energy Conservation Succeed This Summer?
Analysis through Games and Experiments

Yukihiko Funaki
Professor, School of Political Science and Economics, Waseda University

At present, there is vigorous debate about the problems of operating nuclear power stations and lively discussion about last year's energy saving program. Here I would like to take as my main theme the analysis of the energy saving issue using game theory.

Game theory is the analysis of rational decision-making, and is characterized by an awareness of the existence of another decision-maker and by the idea that the other person is similarly rational to oneself as well. To put it another way, game theory looks at rational decision-making on the assumption that the different participants are definitely thinking the same thing. This may seem an obvious idea, but it is easily overlooked and can in fact be rather difficult to grasp. I would like to ask you to keep this point in mind.

Now let's consider the issue of energy saving, or the reduction of the use of electricity. The availability of electrical energy is limited, so let's think about a situation in which excessive use of electricity leads to power outages. How can we regulate the consumption of individuals and thereby reduce overall consumption? One method is a regional quota system like the one introduced just after last year's tsunami disaster, with rolling blackouts being systematically implemented from area to area. A time quota system of blackouts can be simultaneously applied. As last year's experience has shown, this is an extremely inconvenient method for the areas to which blackouts are allotted. A more desirable method would be to reduce everyone's power consumption fairly. But how can we implement it?

Let me introduce a game model as an example of analyzing this situation using game theory. Say there are ten participants, each of whom chooses a resource utilization level of 1, 2, 3, 4 or 5. The number corresponds to that participant's use of electricity. So long as the total of all ten participants' utilization levels is 25 or less, the benefit gained by each participant increases in proportion to their utilization level. In other words, greater use produces greater benefit. But once the total of all the participants' utilization levels exceeds 25, the benefit to all of the participants becomes zero. This corresponds to a blackout.

A typical solution in game theory (called Nash equilibrium) would be a set of utilization levels which all added up to 25. When the sum of levels is 24 or less, there is always someone who would benefit from increasing their utilization level. That is to say, the situation is not in equilibrium. For the participants to utilize electricity equally they should all have a level of 2.5, but this is not possible so most of them choose level 2 or level 3. However, such a method of adjustment is not clear. More specifically, the optimum selection for individuals in this situation cannot be clearly defined. In this sense, game theory does not tell us the optimum action.

Let's try to analyze the problem in a different way, by an approach using experimental economics. My group at Waseda University recruited student participants to conduct this game at the political science and economics laboratory in the winter of 2010. The participants were able to get actual monetary rewards depending on their own selections. They were also unaware of who the other participating members were, and could make their decisions in individual computer booths. A range of utilization levels from one to five were selected. The sum of the levels was mostly between 26 and 30, which is slightly too much, so the most common result was that all the participants obtained zero reward. This illustrates how difficult it is for people to regulate their consumption among themselves.

We also compared different strategies in this series of experiments, from which a few interesting results appeared. For instance, we made the same group repeat the selection of utilization levels several times. The experiment was done based on the rule that participants changed their levels from the standard setting having been told the previous sum of utilization levels, so they should have been able to adjust more easily, but conversely they did not do well. Indeed some results were rather poor. This suggests that giving people details about electricity utilization only has a small effect.

The likely reason for this is as follows. Remember the point I mentioned at the beginning. For example, the sum of utilization levels reached 26. In this case, some might have thought it was OK to maintain or even slightly increase their own level because the other people would probably reduce their levels. Unfortunately, however, many participants thought exactly the same, that they did not have to reduce their own utilization level. In other words, it was impossible for only one person to steal a march on the others, and the total could not be reduced. It could have been avoided if people had realized that everyone else was also thinking the same way, but that never seems to happen. That is to say, this kind of strategy of disclosing information does not work well. The result of this experiment suggests that disclosing the utilization levels of electricity, as power companies have done, does not necessarily produce the expected effect.

Meanwhile, we also tried the following strategy. When the sum of the utilization levels exceeds 25, the people using the largest amount of electricity are forced to stop using it in order to maintain the overall supply. First, all level five users stop use, and if the sum of levels is still excessive then level four users stop too, and so on. Eventually, some people will be able to use electricity. And level two or less users will definitely be able to use it. In fact this strategy was also unable to resolve the problem of excessive use of electricity, but it did expose an interesting phenomenon. That is, it narrowed the range of utilization levels to two to four compared with the previous range of one to five.

This happened because people were afraid of being eliminated and felt the selection of level two was very safe. In other words, consumption was stabilized. In this sense, the strategy of announcing the cut of supply to large consumers of electricity could be expected to demonstrate a certain efficacy.

There is not enough space here to show more detailed results, but I hope you have understood something about the concept of game theory and its effectiveness and limitations, as well as the validity of experimental economics.

The importance of game theory and experimental economics is being recognized in an increasingly wide range of fields. It is very dangerous to implement practical strategies without knowing whether or not the consequences will be as expected. Game theory and experimental economics may offer effective pretests for this purpose. To date, they have been used in setting up emissions trading markets, and they will probably be used in future to handle important issues such as pension reform and consumption tax rate changes.

Yukihiko Funaki
Professor, School of Political Science and Economics, Waseda University

Earned a doctorate in system science from the Interdisciplinary Graduate School of Science and Engineering, Tokyo Institute of Technology in 1985. He was a full-time lecturer, assistant professor and then professor on the Faculty of Economics, Toyo University before becoming a professor at the School of Political Science and Economics, Waseda University in 1998.
His areas of specialization are game theory, mathematical economics, and experimental economics.
He is the leader of projects related to game theory and experimental economics on the Global COE Program in Waseda University.