Game Theory (Economics)

What is Game Theory? It is the study of the interactions between a few or more elements occurring in a specific environment. That is my version of the definition of course, the way I understand it. However Game Theory appears in many fields of studies, for an example more commonly in mathematics and economics.  John Forbes Nash was the Nobel Prize winning mathematician who is honoured with the formulation of the Game Theory.

In economics Game Theory refers to;

“the study of mathematical models of conflict and cooperation between intelligent rational decision-makers” – Wikipedia

Simply it is a form of strategic decision making relevant to the competition within a market.

Game Theory consists of four core areas.

1.  Deterrence
2. Cooperation
3. Changing the rules of the game
4. Repeat games

Deterrence

This means that the players within the industry/market compete so heavily that it actually results in negative outcomes for all the players and the sustainability of the industry. Basically it leads to ‘unhealthy competition’.

Features of Deterrence

•           Reduction of prices
•           Heavy expenditure on advertising simply to fight competition
•           Unethical competition
•           Liquidation of businesses unable to face heavy competition

In such instances the government or any other regulating body will have to intervene the market and implement some rules, regulations and restrictions to save the industry.

Cooperation

This is quite the opposite of Deterrence discussed above. Here the players in the market will understand the market and the existence of other players and work in cooperation. The players will understand and respect the values and long term vision of the industry and will not act to destroy it for personal gain.

Changing the rules of the game

This is where some player in the market decides to do something different or swim against the current. The player will try to change the structure and the form of the game in order to achieve a competitive advantage over the other players. It could work both ways, for his advantage or for the downfall if not implemented properly.

Repeat Games

This is simply the cycles of games being played over and over again throughout a period of time. This is quite similar to Cooperation. The players will acknowledge the presence of other players in the market and adjust themselves based on the strengths and weaknesses of each player.