Game Theory, Cartels & the Eviction Moratorium.

ADD and the internet are a terrible combination. There are so many distractions out there for one to hyper-focus on. I remember hearing about Instagram when it was first becoming popular. I downloaded the app to see what the hype was about. Next thing I know there is a picture of a girl in a bikini, with some messaging -- do you like this picture -- "Yes" -- then click here --"OK". After maybe 72 hours without food, sleep or showering, I finally decided that I'd had enough, and probably would be fired for missing 3 days of deadlines.

During the COVID lockdown, in a fit of boredom, I geeked out for a few days reading about Game Theory. Game Theory basically models decision making in multiplayer interaction. There are some scenario's with dominant strategies, such as the Prisoner's Dilemma, in which a player's decision maximizes his outcome, regardless of the other player's decision (in the prisoner's dilemma, a player always does better by betraying the other player). Some scenario's reach a Nash Equilibrium, in which players maximize their individual outcomes by cooperating. An example would be 2 intersecting cars arriving simultaneously at an intersection. Both would do better by cooperating rather than each trying to speed through.

A cooperative decision generally requires trust, each player must trust that the other players will act cooperatively. In the Nash Equilibrium stop light scenario, trust is easy since it is in both player's best interest to cooperate. But in a oligopoly or cartel scenario, it isn't always true. In a cartel, groups of players work together to fix price and control supply. All players working together produces a superior outcome to every player acting competitively. However, each individual player may do better, at least in the short term, to cheat. If all of the other players reduce their supply, and only one player cheats, the cheater is usually able to achieve a greater profit.

This is why cartels are difficult to hold together. Even OPEC, which has a large amount of influence over the world's oil supply, is constantly being undermined by member nation's cheating (selling more than their allotted allocation). Saudi Arabia tries to control this, but the higher the price of oil goes, the greater incentive there is to cheat. Pablo Escobar managed a large drug cartel which he kept his members from cheating by offering them a choice between "silver or lead."

So how does this affect apartments? Apartments aren't immune to market forces. When a person can no longer afford his/her apartment the next step isn't usually homelessness. Its usually to move to a more economical situation -- share an apartment, move in with family, etc. In a recession or downturn, this could lead to an aggregate reduction of demand. Apartment owners facing rising vacancies react competitively to this reduced demand by lowering rents to attract new renters. At some price level, demand reappears and the growth cycle resumes.

The housing rental market is an incredibly fragmented industries. Even the largest owners only own small percent of a market's total housing, so it would be nearly impossible to establish any sort of cartel even if it were legal. But what would they do if they could? Wouldn't it be in their best interest for apartment owners to cooperatively reduce supply of vacant units to keep from reducing rents? Well, that is EXACTLY what the eviction moratorium has done. It has kept residents that are unable to afford an apartment from moving out. It has kept both demand high by preventing the need for tighter living situations such as moving in with the parents, and it has kept supply low, by preventing these units from being rented out to new residents. Right now people that are moving to the growth markets we operate in are finding rents rising quickly and vacant units in short supply.

So in a turn of irony, the eviction moratorium, so hated by landlords, has effectively forced them, kicking and screaming, into acting in their own best interest. I would write more, but I have about about 100 TikTok dances I need to go learn.