closer to the structural preference parameters that can predict behavior. Thus, the argument that
preference explanations provide “endless degrees of freedom” (Stigler and Becker, p. 89) is no
longer valid. The progress in scientific methods renders this argument obsolete.
Moreover, as economists, we tend to overlook the many degrees of freedom provided by
our standard framework of explaining behavioural changes by changes in the constraints. Game
theory has become an extremely flexible tool that can rationalize a vast amount of different
phenomena by tweaking assumptions about the extensive form of the game, such as the structure
of moves, the choice variables (e.g. prices or quantities), or the asymmetry of information.
Typically, there is no direct evidence available to constrain the specification of the extensive
form of the game, which could lead one to complain about the “endless degrees of freedom”
provided by economic theory to explain empirical patterns.
Exactly this complaint was put forward by John Sutton in his presidential address at the
Congress of the European Economic Association in 1989, when he discussed the state of the art
at that time in Industrial Economics.4 Sutton wrote:
“Paradoxically, it is the very success of these game theoretic models in providing
a rich menu of candidate 'explanations', which leaves them open to a quite
fundamental line of criticism. ... In modelling any particular situation, there is
usually considerable scope for designing the 'structure of moves' (the extensive
form of the game) in various ways, each of which seems reasonable on a priori
grounds. . This richness of possible formulations leads to an often
embarrassingly wide range of outcomes supportable as equilibria within some
'reasonable' specification. . In 'explaining' everything, have we explained
nothing? What do these models exclude?” (Sutton, 1990, p. 507)
Thus, taken together, there are neither methodological nor substantive arguments that
favour changes in constraints over changes in preferences as explanatory factors. Ultimately, it is
an empirical question which would provide the better explanation. However, explanations in
terms of changes in preferences will be convincing only if we have clean measures of preference
4 “The consequent elaboration of a richer class of game theoretic models has been remarkably successful
in one respect: given any form of behaviour observed in the market, we are now quite likely to have on
hand at least one model which 'explains' it - in the sense of deriving that form of behaviour as the
outcome of individually rational decisions. New 'explanations' of this kind have been adduced across the
entire range of the subject: from predatory pricing to vertical restraints, our tool kit has been enormously
enhanced” (Sutton, 1990, p. 506).