Game Theory

What is Game Theory?

Game Theory meaning has a wide Range of applications in the business world. Basically, it is a game that includes only rational players. It is assumed that each participant will try their best to out-compete their competitors and increase their payoffs.

Now, the theory works on the fact that the payoff of each player will depend on the strategies and plans implemented by other participants. The theory is used to analyze the strategies, identities, and preferences of each player involved in the game. The model is extremely popular in different fields. To name a few, the theory is extensively popular in Economics, business psychology, and politics. The theory suggests that the actions taken by each rational player in the game will have some sort of effect on the results of each player.

The Nash Equilibrium

This refers to a phase in which the outcomes are already declared and the players cannot alter their decisions to maximize their payoffs. Commonly known as “no regrets”, the Nash Equilibrium points to a stage where the players have made their decisions and they should not regret it no matter what the outcome is (even if it is not in their favor).

In many cases, the parties reach the Nash equilibrium phase. It is important to note that once this stage is achieved, there is no turning back. The equilibrium is reached after the trials and errors. If you see it from the businessman’s perspective, then two companies make different choices when fixing the price for interchangeable products until they reach equilibrium.

The Effect of Game Theory in Economics

There is no denying that game theory has fixed a lot of issues that businesses faced with the traditional mathematical economic models. Usually, companies have to make many strategic decisions concerning different business and marketing elements. Now, these decisions have a direct impact on economic gains. For instance, it is quite tough for businesses to decide whether it is the right time to launch a new product, lower the prices to out-compete the rivals and experiment with the trending marketing strategies.

For economists, the concept is one of the easiest and effective ways to get familiar with oligopoly. The game theory is divided into different types. However, cooperative and non-cooperative happen to be the most popular ones.

Let’s take an example. Two prisoners are arrested for committing a crime, however, the officers have no evidence against them. The only way is to make them confess. They decide to question each prisoner in separate chambers to get the information. They decide if both make a confession, they will be sent behind bars for 5-years, however, if neither confesses their crime, they will get two-years of prison. If one of them confesses their crime, then the other one would get a 10-year prison. The best decision is to not confess. Both prisoners are most likely to confess since it will sound a favorable decision to them individually.