A few game theory definitions and the most applicable games

game theory definitions

A game theory can be understood in difference perspectives. That’s why it is not easier to give a simple game theory definition.  However, the major objective of the theory is to define rational strategy- Christiansen, Bryan. They take it “as the study of strategic interactions between players based on difference preferences which lead to different results.” McMillan states that ‘game theory is a rational analysis to understand inter-depending relations between players.’ Here you will find a few precise game theory definitions:

  • “Set of concepts aimed at decision making in situations of competition and conflict (as well as of cooperation and interdependence) under specified rules” –BusinessDictionary.com

  • “It’s the general framework to help decision making when firm payoffs depend on actions taken by other firms” –Mcgraw Hill's game theory definition
  • “The study of mathematical models of conflict and cooperation between intelligent rational decision-makers.”- Roger B. Myerson
  • “Game theory is concerned with how rational individuals make decisions when they are mutually interdependent.”- Graham Romp's game theory definition
  • “A model of optimality taking into consideration not only benefits less costs, but also the interaction between participants.  Game theory attempts to look at the relationships between participants in a particular model and predict their optimal decisions.” - Investopedia
  • “The analysis of a situation involving conflicting interests (as in business or military strategy) in terms of gains and losses among opposing players”- Merriam Webster Dictionary 

Cooperative versus Non-Cooperative economic games

There are two basic categories or nature of games in, which all economic games are included.

Players agree upon legal contracts or resolutions regarding joint strategies in cooperative games. For example in oligopoly, few firms decide to set identical price for the identical product or services. Such strategy enable them to avoid uncertainty of sales volume and price fluctuation. Some companies even jointly decide about the volume of production too. Another example is, when two firms decide to invest on a new technology research, assuming that each one of them know how to do it individually.

But, in non-cooperative games, players or business entities don’t make any joint strategy. For example, your firm is competing with another. You know that by underselling against your customer will enable you to capture more market share, but you also know that, such strategy can cause an aggressive price by your competitor as a reaction.

In both categories of economic games, analysis is purely drawn out of mathematical calculations or using the quantitative approach.

Hopefully, this interesting article would enable you to understand this 100% practical concept of economic reasoning at an introductory level. You will see how a little number crunching can save you from getting whipped by your competitors.

Types of games in game theory

Depending on the situation most applicable type of game is “played”.  The purpose of explaining them is to understand, how the types differ. You need not go deep into these types right now. Few of them are as below along their characteristics:

•              Symmetric or Asymmetric

(If the two players interchange their moves, the payoffs are also interchanged and payoff levels are identical)

•              Zero-sum/non-zero sum

(The sum of the payoffs to equals to zero. A player has a positive payoff only if the other player has negative payoff.

•              Sequential or simultaneous

(All moves are made side by side, simultaneously. Both player can’t move at the same time. Usually, players may have to move several times)

Game theory and managerial decisions

Application of game theory

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