theme 3 : game theory

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4 Terms

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game theory explanation

  • applies when the bodies which are competing in the market place exhibit interdependent behaviour

  • this means that for each one the actions of the other will have an impact on the decision taken

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when can game theory be applied

  • applied in a rage of situations, whether the business are competing or colluding with each other

  • there may be gainers or losers or all may gain together

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what is game theory based on

  • based on the principle of the prisoners dilemma

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how are decisions made

  • decisions made by one firm in an oligopoly depend on assumptions made about other firms

  • economists attempt to model this behaviour by using the pay off matrix