What is Game Theory

Game is a confert between two or more parties. It is a decision situation with multiple decision makers where each person’s welfare depends on his/her own as well as other individual actions. Hence game is the decision situation with strategic interactions among all  decision makers. For the game:

The Player: Who is involved

The Rules: How do player move? What do they know & when they  move? What can they do?

The outcomes: for each possible set of actions by the players, i.e. outcome of the game.

The payoffs: what are the players preference (utility function ) over the outcome.

‘The concept of the Game Theory started with the publication of “The Theory of Games & Economic Behavior” 

J.V. Newman & O. Morgenstern  in 1944.

“Game theory is the study of how people behave in strategic situations. By strategic we mean a situation in which each person, when deciding what actions to take, must consider how others might respond to that action” -N.G. Mankiw 

“ Game theory analyzes the way that two or more players choose strategies that jointly effect each other” -Samuelson & Nordhaus. 

Activities of Game Theory

Game theory is the mathematical technique used to show how oligopoly firms play their game of business with the following activities. 

Strategy: A specific course of action with clearly defined values of the policy variables. 

Strategic interaction: A situation in oligopolistic markets in which each firm’s  business strategies depend upon its rival’s plan. 

Payoff: The payoff  of a strategies is the “net gain” it will bring to the firm for any given counter strategy of the competitors. The  profits or utilities of the different players are the payoff. This gain is measured in terms of the goals of a firm. 

Payoff table /matrix: payoff matrix of  a firm is  a table showing the payoff accruing to this firm or a result of each possible combination of strategies adapted by it and its rivals.