Login with Facebook

Introduction to the Game Theory

One thing that makes us human is that we cannot exist without interacting with one another. Sometimes, it may seem like we have always found a way to survive, even with these interactions. Our economic structures and development call for these interactions because there would be no production or exchange if there is no understanding between individuals. In all situations, consumers consider what producers are making and their affordability before making the consumption decision. On the other hand, manufacturers look at how much consumers are buying their products before making production decisions.

However, these interactions are not always good; sometimes, they cause disastrous confrontations, which could turn out really bad. Across human history, there have been countless recordings of wars and fights, all of which lead to the fullness of the corporation. In many cases, social interaction is potential harmonious and corporative, and conflicting and disaster. Take, for instance, the relationship between couples, siblings, countries, management, neighbors, and many others. Today, you will hear two parties are existing in peaceful terms, and tomorrow they will be fighting. There is always some sort of force behind these relationships.

For instance, it could be understood to argue that technology and development have been key in the facilitation of these relations. There are all types of institution cropping up and scientific inventions that aim to make human life much easier. They have all existed as part of human society today to fuel and facilitate these interactions. A good example is the internet technology. Today, it is hard to imagine a world without social media and the World Wide Web that has made the world seem like a small village. When it comes to market, the technology has become a vital aspect of fueling the buyer-seller relationship. However, there is a huge negative impact drawn from this technology, whereby it encourages cheating and fraud.

Understanding relationships

In the labor market, employers and employees seem to have a conflicting idea about wages and working conditions. In these labor unions and labor laws, come up to draw the line between what is right and what is wrong. By doing so, they encourage proper coexistence by ensuring these challenges and conflicts have been addressed. Apart from these, we have been faced for many years, by cultural and religious norms, like altruism or reciprocity, which may potentially create negative interaction between people. However, culture is constantly changing due to human interaction. The evolve to align with the changes in the underlying interactions. For this reason, it is not easy to understand human behavior in its social and institutional context unless there is proper knowledge of human interaction.

And there are several subjects dedicated to the study of these interactions, including economics, psychology, and pollical science. Each of these subjects deals with specific aspects of human life. Many times, however, they take individuals in isolation in order to provide useful data. What this means is, an expert will have to assume that one's behavior does not have any effect on another individual. Under some situations, this assumption and be verified, especially when it comes to how significant the effect is or is not. For example, the price charged by a small wheat farmer in an African country will not impact the price of the product in the rest of the world. Also, the probability that a one-person vote will change the outcome of a country's presidential election is very insignificant. Hence, if we are interested in a larger area of study, it is safe to assume their action will not affect the entire system.

This assumption, however, as led to wrong conclusions on many occasions. If you consider what that same farmer charges in the same area, compared to others around the home, we can say their actions affect others directly linked to them. If they set the price very low, consumers will not go to their competitors, which leads to their products getting spoilt. And if they set too high, the chase away potential buyers. So, assuming that they don't consider this effect while making their decisions, then we will not understand their behavior properly. On the other hand, a small committee of voters may consider the vote of one of them to determine where they cast theirs.

The game theory is based on these exact interactions within groups of people, in which the action of one directly affects the others. But this, not enough reason to set the proper environment of the game theory; people have to act or behave strategically, understanding that their actions affect others around them. One must understand that their actions have an effect on the results, yet this does not necessitate strategic behavior if the individual does not understand this fact. In this case, it is safe to say the game theory looks at strategic interaction within a specific group of people.

Important terms in the game theory

The game theory is simply based on the games that people play. Let's take an example of a case where two or more players are involved in know payouts of quantifiable consequences. Were can use the game theory to know what will come out. But before looking at this, let's consider some terms used in the study of this idea.

- Game. A game is defined as any set of situations a result depends on the action two or more participants who must make decisions.

- Players. These are strategic decision-makers involved in the game context.

- Strategy. Every player gets into a game with the aim of winning. And to do this, they have to come up with a plan of action they will take, considering the set of circumstances that might come up with the game.

- Payoff. With every step a player takes, there is an outcome, some which are pre-determined, and others are not. This is called a payoff, and it can be in any quantifiable form, like cash or utility.

- Information set. At every given point a game, there is information that must be made available to help players in their question. This term is usually used where the game has a sequential component.

- Equilibrium. This is a point in the game where both players have made their decisions, and the outcome has been reached.

There must be assumptions of the rationale in every economic concept, and the game theory is not different. Also, there is the assumption of maximization, where it is assumed that the players make rational decisions and will do everything possible to maximize payoffs in the game. It is important to study these assumptions because they help us determine how consumers make a decision. The game theory is critical in explaining the relationship between consumers and producers within and economy.

For those who wish to examine games that are already underway, it is assumed on your behalf that there is an inclusion of all payoffs associate with an outcome within the listed payouts. If any "what if" scenario may arise, it must be included within the listing. Also, the number of the player in a certain game can be infinite – in theory – but most games only consider two players. The simplest example is a game involving two players, which is a sequential game.

Game theory is basically the study of rational behavior in the case that involves interdependence. It is the best and formal method of analyzing how a group of rational individuals interact when they have a strategy. Traditionally, it was used in determining zero-games in which the losses from the other party initiate one party's gains.

Since humans are naturally rational, they take actions that are carried in their goals. Interdependent is where any player is impacted by others' behaviors, whereby their actions depend on the prediction of how others will respond. In other words, before an individual takes a step, they must know how their actions will affect others. For this determination to work, the actor must have knowledge of other's aims as well as all the options at their exposure.

The Game Theory and Economics

The game theory is not just a game, but a thought that has been used over the years to make a decision regarding price, output, product development, product promotion, and other business situations. This theory has become a vital aspect of the modern business realm as it helps decision-makers in the economic sphere to achieve, or get as close as they can to their goals.

Here are some of the most common examples of the game theory applied in economics:

- Buyers and sellers are negotiating a price. We already know that price is one of the main determinants of consumers making decisions and producers making a profit. For this reason, each of them must get the best deal that makes them feel satisfied.

- A firm and its competitors. A company is always faced with marketing strategy decisions that best beats what the competition is offering. From time to time, they interact with this competition either positively or negatively. The firm can use the game theory to determine the strategies that work the best.

- Auctions. Actions are like a game of luck where the highest bidder wins the day.

- Prisoner's dilemma

There is a need to analyze the cooperation in the game theory, which is done through a non-zero-sum game known as the Prisoner's Dilemma. This idea was originally presented by Merrill Flood and Melvin Dresher while working at RAND in 1950. Later, Albert W. Tucker formalized the game with rewards that come from a prison sentence, terming it, "Prisoner's Dilemma." In this situation, there are two members of a criminal gang who are arrested and imprisoned. Each of them is placed in solitary isolation, and they have no way of communicating with each other.

On the other hand, the prosecutor does not have sufficient evidence to lock them based on the main charge; hence, they are expecting to spend a year in prison for a lesser charge. At the same time, the prosecutor comes up with a bargain or offer for each prisoner. They are given a rare opportunity to betray the other for committing the crime or remain in solidarity with the other prisoner. So, they are faced by three major dilemmas;

- If A and B tell on each other, they risk serving two years behind bars

- If A speaks but B remains silent, A will go free as B serves three years, or otherwise.

- If none of them speaks, they will only serve one year on a lesser charge.

There are two moves for each of these players – to either cooperate or defect. The main point of concern is that each player gains when they cooperate; however, if only one cooperates, he/she will at the expense of the other. And they both lose if both defects.

According to economists, the Prisoner's Dilemma games are zero-sum because there is no cooperation. The results are already pre-determined that either each gains 0 if they defect, or one defects and gains (+10), while the cooperator gets (-10), which brings the total to 0. There is a positive gain where each of them cooperates, where each gets 5, making a total of 10. One-sided defection makes bigger gain (10) than cooperation. And this is why there is always a temptation for defection, as shown in the table below.

 Action of A / Action of B

 Cooperate

 Defect

 Cooperate

 Fairly Good (+5)

 Bad (-10)

  

 Defect

 Good (+10)

 Mediocre (0)

The sequential move theory

The Prisoner's Dilemma game is a simple game in which both players need to move at the same time. Apart from this, there is another game that involves players making their moves in specific sequences. It is called Sequential Move Games. In this case, player A is a newer player on the market, and they can either enter the market or avoid it altogether. Player B is already established in the market, and he can either choose to accommodate player A as a competitor and avoid raising prices, or initiate a price war. Player A has a better chance of entering the market because B gains a payoff (1) if he/she accommodates themGame Theory and Economics, or lose (-1) if they start a price war.

Author: James Hamilton


Comments

Need a custom
essay?

We will write it for you.
Order now

Free Essay Examples

Free essays:

All you need to know about Neuroendocrinology
All you need to know about Big data management
All you need to know about digital special effects
All you need to know Technical Writing?
Basics the Game Theory in Cryptoeconomics
Business innovation ideas for making money
Biosensors for cancer diagnosis
Business Analysis: Pricing strategies and Demand Curve
Consciousness: characteristics and peculiarities
Conservation Economics
Cybersecurity in business: challenges, risks, and practices
Corporate Behavior
Dance as an art form and entertainment
Discrimination Economics
Determinants of Wages
Deontology Vs. Utilitarianism
Ethics: an essay on the understanding of evil
Emotions: what are they? Theories explained
Economy and Air Pollution
Economic Externalities and How to Deal with Them
Factors Affecting Purchasing Behavior
Financial Statement Analysis
Factors Influencing Interest and Exchange Rates
Fiscal and Monetary Policies in Response to 2008/2009
Government's Intervention in The Labor Market
Guide on the Pathways of the nervous system
Game theory in microeconomics
Globalization: definition, causes, social impact and risks
How women can manage sexual harassment
How to conduct economic research?
How to define the Enterprise Value
How cancer is developed - Cancer biology
Imperfect Information and Asymmetric Information
Imperfect Information in Insurance
Introduction to Labor Markets
Investment in Human Capital
Journalism: What is News?
Journalism: Broadcast media and Television Presenters
Journalism: Sources of News
Journalism and Law
Key Determinants of National Income
Key Factors That Affect Pricing Decisions
Kinetic models in biology and Related fields
Know about the different forms of traditional African dances
Latest technology trends
Latest dance trends
Microeconomic Analysis to the Demand for Labor
Modern journalism
Neuromuscular disorders
National Economies, Fluctuation, and Responses to Fluctuations
Neurotransmitters: what they are and different types
Nanomedicines to target tumors
Organizational motivation and its effects
Overcoming Hiring Challenges for Nonprofit Organization
Parkinson's disease
Perspectives on Television: Analysis
Russian School of Mathematics
Research and Development
Risk Sharing in Insurance and Asset Markets
Risk and the value of information
Structure of the nervous system
Structure of a Corporation
Schizoaffective disorder: how to live better with it
Segregation in the US.
The Role of Internal Audit in Corporate Risk Management
The Use of Law on Economics and Vice Versa
The political theory of Thomas Hobbes
The Game Theory in Social Media
Unions
Unemployment
Utilitarianism Vs. Kantianism
Understanding Auctions and Auction Theory: Part 2
Various theoretical perspectives of sociology
Virtual reality, what it is and how it works
What is Transcranial magnetic stimulation (TMS)?
What are the different genres of films?
4 Facts about Origin of Mathematics!
5 techniques to create an animation
10 emerging technologies according to World Economic Forum
10 strategies to maximize corporate profits
3d Model Of Building
6 Medical Technologies that revolutionized the healthcare in 2020
All you need to know about the ACA Code of ethics
Architecture and Democracy: An Introduction
Architecture and Democracy: Democratic Values
Architecture and Democracy: Democratic Procedures
All You Need to Know About a Synthesis Essay
An essential guide to understanding Film Theory
Application of Artificial Intelligence in Cyber Security
Applications of electrical engineering
Augmented reality: what it is, how it works, examples
Advantages And Disadvantages Of Social Networking
All you need to know about Cryptography
Applications of astrophysical science
All you need to know about architecture engineering
Applications of geological engineering
Artificial intelligence and medicine: an increasingly close relationship
An insight into Computational Biology
ACA code of conduct
A Rose for Emily
Applications of Mathematics in daily life
Architecture mistakes to avoid
All you need to know about Toxicology
All you need to know about Holistic Medicine
All you need to know about linguistics
An introduction to Linguistics and its subfields
All you need to know about Anxiety disorder
All you need to know about Drones
A Brief Insight into Political Science
Assumptions related to feminism
All you need to know about Byzantine emperors
All you need to know about labour economics
An insight into xenobots -the first-ever robots
An ultimate guide about Biomaterials
A Comprehensive Introduction to the Mona Lisa
Analysis methods of Transport through biological membranes
An ultimate guide about biochemical reactions
Analysis of brain signals
Artificial Gene Synthesis
Application to synthetic biology of CAD methods
All you need to know about metabolic pathways
Applications of BIOMEMS
All you need to know about the epidemiology
Asian vs. western leadership styles
All you need to know about Smart prosthesis
Analysis of Economy: Output of Goods and Services (GNP), and GDP on Economic success
A Guide to Pricing Strategies
An Overview Of Economic Studies
Analysis of Fiscal and Monetary Policies
Analysis of Business Cycles
Analysis of Consumption and Investment
A Look into Regression Analysis
Analysis of Household's Consumption and Savings Behavior
All you need to know about Capital Budgeting
All you need to know about risk management
Art looted in wartime.
Appropriate use of Data in Economics
All you need to know about reaction kinetics?
A historical overview of Financial Crises
All you need to know about management discipline?
An insight into the error-correction models
All you need to know about Data visualization
All you need to know about Work-family balance
All you need to know Technical Writing?
All you need to know about digital special effects
All you need to know about Big data management
All you need to know about Neuroendocrinology
How to Write a Personal Essay
Housing Needs in America
How to Write a Description Essay
How to Create an Excellent Scholarship Essay?
How to write a cause and effect essay
How to Hire the Best Essay Writing Service Provider?
How to Write a College Application Essay?
How to get the most out of your English lectures
How to write Expository Essay
How to succeed in your psychology class?
How to Write an Academic Essay in the Shortest Time?
History of Journalism
How Different Sectors are Using Artificial intelligence (AI)
How to write an informative essay
How to deliver persuasive essays?
How to Give a Convincing Presentation
How to write an essay on leadership?
Historical Art Still Around Today
Humanoid robot: what it is, how it works and price
History of Chemistry
Healthcare Advanced Computer Power: Robotics, Medical Imaging, and More
Healthcare AI: Game Changers for Medical Decision-Making and Remote Patient Monitoring
How to understand different types of English
How to Cope with Chronic Pain
How African American choreographers and dancers have influenced American dance
How mobile robot can do in logistics or in production
How To Become a Successful Entrepreneur
History of the Philosophy of Feminism
How is the climate changing?
How to Track Your Content Marketing ROI
How to Gun control In the USA?
Historical and contemporary role of labour in the modern world
How breast cancers are classified?
How the cells of our body communicate?
How the Lymphatic System Works?
How Digestive System Works
How to complete your capstone projects effectively?
How to write a research project
Healthcare technologies that help patients with better self-management
How to choose the topic of the senior capstone project
How to make your business survive at economic crisis
How can immigrants blend in the American society?
How does the economics of war affect society?
Hate speech on social media.
How to Build an Economic Model
How to start a healthcare startup?
How can financial illiteracy harm you?
How cancer is developed - Cancer biology
How to define the Enterprise Value
How to conduct economic research?
How women can manage sexual harassment
Introduction to Urban Studies
Importance of dance in education
InMoov: how to build an open source humanoid robot
Importance of KYC verification to making the Blockchain secure
Importance of Rhythm
Importance of dance student evaluation
I/O control methods -types and explanations
Identity theft: what to do?
Introduction to Utilitarianism
Importance of 3d Modelling in Architecture
Importance of online journalism
Image processing in medical diagnosis
Introduction to USA Politics
Introduction to Comparative Politics
International Relations as a Major in Political Science
Importance of modern trade policy
Introduction to Journalism
Introduction to Writing a TV Script
Introduction of Microfabrication techniques
Introduction to Microeconomics
Interaction of Consumer and Firm Choices in Markets
Importance of corporate sustainability
Issues in International Monetary Macroeconomics
Introduction to Statistics and Data for Economics
Introduction to Data and Probability for Economics
Introduction to the Game Theory
Introduction to Econometrics
Introduction to Economic Information
Introduction to Market Equilibrium
Introduction to Economic Models and Application
Introduction to Empirical Research
Introduction to Econometric Data
Importance of Critical Thinking, Principles, and Goals
Introduction to Identification and Causal inferences
Introduction to Econometric Application
Intermediaries and Government in Financial Crisis
Importance and seven principles of quality management
Illiteracy in the USA
Introduction to Economics of Law
Introduction to Coase Theorem
Introduction to Social Choice and Incarceration
Intellectual Property and Product Liability
Investment in Human Capital
Introduction to Labor Markets
Imperfect Information in Insurance
Imperfect Information and Asymmetric Information
The Looming Energy Crisis in America
Top benefits of performance-based engineering
The More Languages You Know, The More Times You Are a Man
Things to consider while writing an Argumentative Essay
Top Ways to Improve Your Academic Writing Skills
Tips to Excel in Creative Writing
The origins of films in the early 19th century
Top career options in Architecture
The Elevator Pitch
Top finance trends 2020
The basic Structure and functionality of robots
The Way to Success
The election system of the President in the United States of America
Two-party System in United States of America
Top trends in urban design
The history and theory of African American filmmaking
Top benefits of creative writing
Tinnitus Guide: Common Symptoms and Treatment Options
The language of dance
The digital image processing management
Top famous politicians of the World
Top methods of political science!
The history of the feminist movement
The blood flow in cardiovascular system - Biofluid Mechanics
The best of Leonardo Da Vinci
The Structure and Function of Macromolecules
The structure of cell: a research on the bricks of the human body!
Tissue and organ construction: Adhesion and recognition between cells
The kinetics of the transformation processes
The Modeling of Biological Systems
Tips for writing a great thesis statement
The Defense mechanisms against infections
The impact of the technological innovations in medicine
Top journalism trends to know about
The relation between mass media & politics
Theranostics: Diagnosis and Care through Nanoparticles
The practical Applications of X-rays
The applications of Ultrasound in medicine
Transfer mechanisms of genetic information in Bacteria
The regulation of cellular metabolism in the diagnosis
The Principles of MRI Contrast agents
The technical basis of optical coherence imaging
The New Media: Emerging Trends
The Structure of Interest Rates and the Yield Curve
Technological perspectives and reflections of neural engineering
Types of bioreactors and their applications
The Role of Government Policy in Improving Economic Outcomes
Types of corporate responsibility
The Role of IMF in International Monetary Macroeconomics
Tools for investment decision making
The concept of Organizational Culture and its applications
The Conduct of Monetary and Fiscal Policy
The Basics of Financial Accelerator Models
Tips for labeling medical devices- Medical Entrepreneurship
The different medical imaging techniques
The Economics of Uncertainty – Introduction
Theories of Public Policy
The Game Theory in Social Media
The political theory of Thomas Hobbes
The Use of Law on Economics and Vice Versa
The Role of Internal Audit in Corporate Risk Management
What is a Definition Essay?
What are diagnostic essays?
What is the relation between art structural engineering?
What is a Narrative Essay
What are robotics and intelligence systems?
What are the benefits of studying health sciences?
What is artificial intelligence and why it matters?
What is comparative Literature?
Why study neuroscience
What is Wi-Fi and how does it works
What is French history famous for?
What are Humanistic Studies?
What is covered in Biophysics?
What is modern journalism?
What is Virtualization? Benefits & Applications
What are modern public relations?
What is plasma physics?
What is teacher preparation?
What is rapid prototyping for 3D printing?
What is contemporary European Politics?
Why should you learn American Ballet?
What is engineering physics?
What is the purpose of African American Literature?
Ways to learn the Rhythm
What is digital art used for?
What are Enzymes and how do they work
Who is the father of political science?
Why Study Political Science - Job?
What is the Philosophy of Feminism?
What is a quantum computer?
Ways B2B Startups Streamline Their Conversion Strategies
Why do biomedical signals need processing?
What are the long term effects of climate change?
Why study labour relations
What is Holoprosencephaly?
What is antisocial disorder?
What are the important principles of evolution?
What is the cytoplasm and its function?
What is biopolymers?
What Makes a Good Leader
Women empowerment in modern generation
What is the history of political thought?
What is Gene recombination
What is synthetic biology
What is business cost analysis?
What is Inflation
What are the consequences of unemployment?
What is lithotripsy and its types?
What is transition elastography?
What is the purpose of deep brain stimulation?
What is a Brain-Computer Interface (BCI)
What is neuroethics?
What is Market and Supply and Demand
What is optogenetics?
What are the techniques to record brain activity?
What happens if the interest rate increases?
What is immunotherapy?
What is the economic role of the financial market?
What are the factors behind illegal immigration?
What is the lymphocyte activation?
What is financial market and its types?
What is the structure of financial markets?
What are the methods of measuring business performance?
What is the Credit market?
What is business ethics and code of ethics
What are the Causes of financial instability?
What is MBA with Concentrations
What is regenerative medicine?
What is Population ecology?
What is Microfinance: evolution, and practices?
What is biotechnology and its applications?
What are Workplace diversity and its benefits?
What is the difference between a leader and a manager?
What Is Branding and best branding Business strategies?
Why are microelectronics important?
What are biologic drugs.
What is the Foreign Exchange market?
What is the role of scientific research in times of crisis?
What are the risks of international trade?
What is financial management?
What is gene therapy?
What is education economics?
What is regression analysis, and why should you use it?
What Is Technology Marketing And How Should It Work?
What is Management Accounting
What are the methods of valuation of companies?
What is Immune System and Immunotherapy?
What is big data analytics?
What is the 7 layers of OSI model?
What is Neuroplasticity?
What are Sculpture art and its types?
What are the different genres of films?
What is Transcranial magnetic stimulation (TMS)?