Learn how game theory is used in economics to analyze strategic interactions and predict market outcomes. Explore the applications and benefits of game theory in economic scenarios.
Game theory as a field of study came into existence in 1928, when mathematician John von Neumann published a series of analyses. During this period, game theory studies focused primarily on cooperative game theory.
Game theory gained weight throughout the 1950s, when the first discussions of the prisoner’s dilemma were established and the Nash equilibrium , the greatest exponent of non-cooperative games, was developed.
Over the last few decades, game theory has been studied in depth, serving as a basis for applications in various areas.
How is Game Theory Used in Economics.
Game theory shows the equilibrium of two firms on the basis of a game in which the profit of one depends upon the loss of other.Any firm adopts different strategies to achieve its targets. Its includes the prices, quantity of goods, production techniques, standards of goods etc. To adopt the above different combinations for a firm is called strategies.
According to game theory the victory of one firm is the loss of other firm Every firm adopts different strategy to maximize the profit. But if there is un-written agreement between two firms then both can increase its profit. Where these two firms agree for un-written agreement that point is called “NASH EQUILIBRIUM or “SADDLE POINT.”Assumptions:
Game Categories
Game theory deals with decision-making situations involving several people. The best decision that one person makes depends on the decisions of others. The goal is to make the optimal decision. Game theory is very diverse . It can be differentiated according to the types of games or the areas of study.
Symmetrical
When there is a symmetric game, all players adopt the same strategies . In this type of game, symmetry is only possible in the short term, that is, in short periods of time. And when there is more simple time, a greater number of options arise for the players. In a symmetric game, decisions depend on the strategy used, not on the players in the game itself. Players can even be exchanged and the decisions remain the same in symmetric games.
Cooperatives
This part of game theory is characterized by two or more people coming together to achieve a common goal . Here all possibilities are analyzed and a series of strategies are developed to achieve the goal. In this way, the potential that the human race has when working collaboratively is demonstrated and sport is a good example. These dynamics can be transferred to multiple activities in which you have to team up with others at some point.
Zero or non-zero sum
This dynamic is very exact, and if one user wins, the other loses, and vice versa . This would be an example of a zero-sum game, since there are only two possible options, and this applies to poker and chess. However, games such as football and the prisoner’s dilemma are part of non-zero-sum dynamics. The reason is that here a tie can occur, which benefits both parties in some small way, something that does not happen in a zero-sum game.
Nash equilibrium
The Nash equilibrium is one of the most widely applied examples today. It basically consists of the fact that none of the users can win by modifying their tactics while the others do maintain theirs . This means that each decision that a person makes in one way or another harms the situation. Therefore, the interesting thing in this situation is that the players want to improve the situation, but they do not do so because they do not know the intentions of the others. This is how the so-called equilibrium is reached.
Applications of Game Theory;How is Game Theory Used in Economics.
One of the characteristics of game theory is that it can be applied in multiple fields to learn more about human behavior . In economics, for example, it is widely used to study the principles of oligopoly and how it affects the market. In this sense, Nash equilibrium is widely used in cases where no strategy exceeds the expectations of other tactics. Therefore, each player will stick to his strategy as it is better than that of the other competitors.
On the other hand, game theory has been of great help to psychology and psychiatry . Thanks to this concept, it has been possible to study people with various disorders and how they make their decisions. In turn, they emphasize the choices they make when distributing some economic good. Thus, it was concluded that depending on the trust that one has in the partner, a certain decision will be made.
In economic life, there are countless situations in which two or more people, companies or countries have to choose strategies and make decisions that mutually affect them. Game theory attempts to analyse these cases and is used especially in economics to study oligopoly and duopoly markets , in which two or more agents make decisions that jointly affect all participants.
This theory, which conceives of individuals as homo economicus (understanding that players choose the actions that best satisfy their objectives based on their beliefs), also demonstrates how cooperation leads to the common good of the agents who carry it out, while individual action does not. One of the games most studied by game theory is the prisoner’s dilemma.