Game Theory
Game theory is the study of mathematical models of strategic interaction among rational decision-makers. In economics, it is used to analyse situations in which the outcome for each participant depends on the actions of others, and in which each participant must take account of the likely actions of others when making decisions.[1]
Definition
A game consists of a set of players, the strategies available to each player, and the payoffs associated with each combination of strategies. Game theory seeks to predict which strategies players will choose and to identify the resulting outcomes.[1]
Key concepts
| Concept | Description |
|---|---|
| Nash equilibrium | A set of strategies in which no player can improve their payoff by changing their own strategy alone. |
| Dominant strategy | A strategy that is best regardless of what other players do. |
| Cooperative game | A game in which players can make binding agreements. |
| Non-cooperative game | A game in which players cannot make binding agreements. |
| Zero-sum game | A game in which one player's gain is exactly another's loss. |
Types of games
Games are commonly classified along several dimensions, including whether they are cooperative or non-cooperative, simultaneous or sequential, and whether they are played once or repeatedly. Well-known examples include the prisoner's dilemma, which illustrates why rational individuals may fail to cooperate even when cooperation would benefit all, and the oligopoly games studied in industrial economics.[1]
Applications
Game theory is applied widely in economics, including in the analysis of oligopoly, auctions, bargaining, and market failure. It has also been influential in political science, biology, and computer science. The work of John Nash and others on equilibrium concepts earned several Nobel Memorial Prizes in Economic Sciences.[1]