Economic Theories: The Basic Elements Of The Game Theory

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Game Theory Game Theory, the study of interacting between the choices of economic agents production outcomes with the respect to the preferences or utilities of other agents, where the outcomes in question might have been intended by none of the agents (Don Ross). There are a few basic elements of game theory, such as utility, games and rationality, trees and matrices, prison dilemma, interpreting payoffs: morality and efficiency in games, uncertainty and risk, beliefs and subjective probabilities as well as other variables. Game Theory requires very strong logical sense and have strong correlation to behaviorism, social psychology, and economics. First, the terminology “game” under the game theory is a description of a strategic situation …show more content…
A player 's utility is optimized through use of a mixed strategy, in which one pick out of several possible actions. When people make decision, they tend to look for the best and the worst decision along with outcome. The expected payoffs determines what a good or worst decision a player could possibly make. The player would choose to maximize his payoffs by choose the highest probability of best outcomes among the choices, meanwhile minimize the probability of worst outcomes. Such probability includes risk of danger that are taken into consideration and …show more content…
According to application of game theory, many business interactions use game theory methodology. A popular example would be the price-setting of oligopolies which is similar to the Prisoner 's Dilemma. Let’s assume an oligopoly situation exists, if the companies choose to cooperate with each other then they are able to set prices. If they cooperate, both are able to set higher prices and leads to higher profits. However, if one company decides to defect by lowering its price, it will get higher sales, and resulting in gaining bigger profits than its competitor(s), who will receive lower profits. If both companies decide to defect, i.e. lower prices, a price war will ensue (proceed), in which case neither company will profit, because it will only retain its market share and gaining lower revenues at the same time. Business world is complicated and complex, such common and ideal situation like the oligopoly may not always be the case, therefore we should further explain in depth why game theory are applied into business. For example, when companies implement major strategies, there is always uncertainty about how competitors and potential new market entrants will react. We have to develop appropriate approaches based on game theory to help clients better predict and shape these

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