Schelling Point: Cooperating Without Communicating

Let's talk about the shelling point. Shelling point is a game theory concept made famous by Thomas Schelling in the book called "Strategy of Conflict," which I do recommend reading. It's about multiplayer games where other people are responding based on what they think your response is.

What he came up with was the mathematical formalization of how do you get people who cannot communicate with each other to coordinate. Suppose that I want to meet with you, but I don't tell you where, and I don't tell you when. We both want to meet, but we cannot communicate any more information to each other. That would sound like an impossible problem to solve. We're done, we can't do it.

Not quite, because I know that you're a rational person, and smart and educated, and you know I'm a rational person who's smart. We're going to start thinking, well, if we have to pick an arbitrary date, we're probably going to pick New Year's, and what time? Midnight, or 12:01 a.m. And where would we meet? What is a big meeting point? Well, if we're Americans, it's probably in New York City. It's the most important city, and if we're in New York City, we'll meet at midnight, probably Grand Central Station under the clock. Maybe you end up at the Empire State Building, but not likely.

So, you can just use social norms to converge, in this case, onto a shelling point. There are many times in many games where you can look at the game itself, whether it's business, art, or politics, and you can find the converging shelling point within the context of that game, and so you can cooperate with the other person.

Here's a simple example: let's suppose that you have two companies that are competing heavily with each other, and they hold an oligopoly. Let's say that they're competing right now, and the price fluctuates between 8 bucks and 12 bucks for whatever the service is. Don't be surprised if they both converge on 10 bucks without ever talking to each other.