Invented in 1937 by John von Newmann and continues to be a major research topic in economics, the Game theory is a method that economists use evaluate behavior which acknowledges shared interdependence and with consideration of the expected behavior of others, also referred to as strategic behavior. It assists in the understanding many types of economic, political, biological, and social rivalries, including oligopoly.
Typically, a game consists of three features: rules, strategies, and playoffs.
An example to apply the game theory to is the “Prisoners’ dilemma.” The game is between two prisoners who are arrested for a crime but are suspected for a smaller crime without evidence.
There are four different strategies in this dilemma. One being that they both confess and each will receive 3 years of imprisonment, if they both deny then each will receive two years of imprisonment. If prisoner 1 confesses and prisoner 2 denies, then Prisoner 1 will receive 1 year of imprisonment and Prisoner two will receive ten years of imprisonment, and vice versa if the strategy is switched. The trick of the game is that neither of the prisoners will know what the other one will do.
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I think the game theory is a very interesting concept in economics. It allows firms to see what would be the most beneficial choice for them. It also, however, allows them to act in their own self-interest and break their agreements when colluding with another firm.
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