Game Theory Essay

Game opening emerged as a scholarly field of study in the first superstar-half of the 20th century. Since that time, it has profoundly affected various academic disciplines, such as economics, political science and biology. Although the term secret plan theory whitethorn intimate a certain frivolity, the concepts underlying it have some real-world applications and offer a structured and logical method of considering strategical situations. The parallels in the midst of competitive games and strategic production line situations should be fairly obvious. Consider the game of chess. T here(predicate) atomic number 18 deuce players, separately of whom makes moves in sequence.After observing the move do by the first player, the second player makes a counter move. because the first player, having observed the first two moves, makes the third move and so on. Compargon this to the business situation of shove along shoess competing for customers through strategic pricing. (The p layers in this case be piazza A and station B. ) Suppose, for instance, that station A starts by choosing a new pricing strategy. abandoned station As decision, station B decides how it bequeath set its prices. Given station Bs response, station A bath make out to revise its pricing strategy and so on.The objective of each gas station in this game is to maximise its own profit. For each to do so, it must be continually acting and reacting to its competitor in the grocery as well as anticipating competitive responses when making decisions. What does game theory have to offer? First, game theory provides a framework, or formal procedure, for analysing any competitive situation (or game). Specifically, it forces you to identify the players in a game (consumers, sellers, input providers, governments, foreign organisations, etc. , their possible actions and reactions to the actions of other players, and the payoffs or rewards implicit in the game. Game theory models reduce the wo rld in which businesses operate from a highly labyrinthine one to one that is simpler alone nevertheless retains close to important characteristics of the original. By capturing and clarifying the most significant aspects of competition and interdependence, game theory models make it possible to break subjugate a complex competitive situation into its key components and to analyse the complex dynamics between players.In order for game theory to be truly useful in analysing such complex situations, certain assumptions motivating to be made. The most significant assumption is that the players in a game atomic number 18 choosing their actions optimumly that is, they argon choosing their actions in the hope of maximising their ultimate payoff and they assume that the other players are doing likewise. Without this assumption, game theory cannot successfully model real-world situations. Because game theory can realistically model business situations, it helps businesses to make opti mal decisions and choose optimal actions.In other words, by solving a game, a business can identify its optimal actions (assuming, as always, that all the other players are similarly choosing their actions optimally). This is especially invaluable because it helps companies choose the right business strategies when confronted with a complex strategic situation. In what types of business situations can game theory be applied? chaffer on the linkhere to find out. The nature of the solution(s) in game theory also motivates businesses to analyse how the structure of the game can be altered so that a variant (and perhaps a more favourable) game can be played.Because of its systematic approach, game theory allows businesses to examine the consequences of actions that they may not have considered. It is worth noting here that many games involving business are disagreeent from games in other fields. For instance, in business, many players can win (and lose) simultaneously, which evide ntly is not the case with chess. Additionally, because of the interdependent nature of most business relationships, these games are not always ones of direct competition. Consider a game between manufacturer and supplier both have incentives to do well, but each also has a vested interest in the success of the other.Furthermore, unlike some other games with fixed rules, the rules of business are continuously in flux. They may be formulated by law, by tradition or by accident. Often, however, players have an influence on how rules are decided. How does game theory differ from microeconomics? Because game theory can be used to model almost any economic situation, it might seem redundant to study both microeconomics and game theory. However, microeconomics tends to focus on cases in which there are many buyers and sellers or there is one seller (or buyer) and many buyers (or sellers). Yet here are many instances in which there are a hardly a(prenominal) buyers or sellers. Markets in which more than one but still merely a a few(prenominal) firms compete are known as oligopolies. Oligopolists are acutely aware of their interdependence. each(prenominal) firms decisions in the securities industry depend on the specific assumptions it makes about how its rivals make pricing and outfit decisions. In addition, there are other situations in which there is one buyer and one seller. Microeconomics without game theory does not adequately mouth these matters. Consider a grocery store in which the number of producers is small.In aircraft manufacturing, two firms, Boeing and Airbus, control 100 percent of the world market for commercial aircraft. Each firm recognises that its pricing and production decisions have important implications for its rivals profitability. As a consequence, each firm attempts to guess which actions its rival allow take. But each must also recognise that its rival will also be guessing as to what it will do. Clearly, such interactions are i nadequately represented by classic microeconomic models, which assume that the firms are price takers.In some other markets, the number of buyers is small. For instance, the wholesale market for ball fields is dominated by a small group of global firms therefore, rhomb producers may find that implicit (or explicit) collusion between buyers makes it difficult for the diamond producers to exercise market power. Once again, classic microeconomic models may be missing a very important feature of actual markets. bust on each of the links below to read a few real-world examples in which game theory is applicable.