The Game Theory is defined as “a method of analyzing firm behaviour that highlights mutual independence among firms (Morris & Sayre).” The main idea behind the game theory is strategy; each player will evaluate a situation and make the decision that is best for them regardless of how that choice may affect other players (Dixit, Avinash & Nalebuff, Barry).
The game theory was first introduced in 1944 by John Von Neumann and Oskar Morgenstern (SiliconFarEast.com). It was developed and adjusted by many difference scholars over the years. Albert Tucker expanded on the Game Theory and invented the Prisoner’s Dilemma in 1950 (SiliconFarEast.com). Tucker talked about the different strategies that players are able to choose which can be represented in the form of a payoff matrix (see image on right for an example). John Nash later introduced a concept which is now called the Nash equilibrium. This is when no one player can change their strategy to better their position so they both choose a position that negatively impacts them (SiliconFarEast.com).
There are many examples of the Game Theory in today’s economy. One such example can be seen by looking at the movie industry. All Calgary theaters charge similar tickets prices and do not want to upset the balance by changing their prices. Theaters are well aware of the fact that they provide very similar products and each theater has to think about how the others will react before they make a price change. If one theater did decide to drop their price, they would likely attract more customers initially but if other theaters follow suit, they would lose those same customers and now the industry as a whole would be earning less profit. Businesses must continually evaluate how their competitors are acting and adjust their own strategies accordingly.
The game theory was first introduced in 1944 by John Von Neumann and Oskar Morgenstern (SiliconFarEast.com). It was developed and adjusted by many difference scholars over the years. Albert Tucker expanded on the Game Theory and invented the Prisoner’s Dilemma in 1950 (SiliconFarEast.com). Tucker talked about the different strategies that players are able to choose which can be represented in the form of a payoff matrix (see image on right for an example). John Nash later introduced a concept which is now called the Nash equilibrium. This is when no one player can change their strategy to better their position so they both choose a position that negatively impacts them (SiliconFarEast.com).I mentioned a payoff matrix earlier in my blog. You may be wondering exactly how a payoff matrix works. Let me explain it for you. Say I had the option to either stay in my current job or apply for a better position at another company. Now let’s imagine that I have a co-worker that I know would like to apply for the same position. We could both choose to apply and hope the best person is hired leaving us with equal opportunities at the job. My second option would be to tell management about my co-workers intention to apply for the new job and consequently sway management to fire her, which could mar her employment record and lessen her chances of getting the new job. Likewise my co-worker could do the same to me. The third option that we both have is to stay in our current jobs so neither one of us would be hired at the other company. These choices could be visually shown by using a payoff matrix.
Let's look at the principles behind collusive and cartel actions. Collusion is defined as "an agreement among suppliers to set the price of a product or the quantities that each will produce (Morris & Sayre).” Cartel is described as "an association of sellers acting in unison (Morris & Sayre).” Both actions involve businesses agreeing to act together for the common good of each individual business. The goal is for businesses to generate greater individual profits by working together. Even though they are similar, one of the main differences between collusive and cartel actions is that collusion is illegal whereas cartel is not.
Dixit, Avinash & Nalebuff, Barry, Game Theory,
site accessed on November 4, 2012
Morris, Alan; Sayre, John, Principles of Economics, p. 387 - 390
SiliconFarEast.com, Game Theory,
site accessed on November 4, 2012
Hi Alyssa
ReplyDeleteGreat post. I especially like the example you used with the local theatres.