Game theory is a branch of economics that analyzes strategic interactions between individuals or organizations. It provides a framework for understanding the decision-making process and predicting outcomes in competitive environments.
Key Concepts
- Strategic Interaction: When the actions of one player in a game affect the payoffs of other players, it is called a strategic interaction.
- Payoff Matrix: A table that shows the possible outcomes of a game and the payoffs to each player for each combination of strategies.
- Nash Equilibrium: A situation in which no player has an incentive to change their strategy given the strategies of other players.
Types of Games
- Zero-Sum Game: The total gains of one player are exactly equal to the total losses of the other players.
- Non-Zero Sum Game: The total gains of all players can be positive, negative, or zero.
- Cooperative Game: Players work together to achieve a common goal.
- Non-Cooperative Game: Players compete against each other to maximize their own payoffs.
Applications
- Business Strategy: Game theory helps businesses predict the actions of competitors and make better strategic decisions.
- International Relations: It helps understand the behavior of nations in international diplomacy and trade.
- Behavioral Economics: It provides insights into how people make decisions in various situations.
Further Reading
For more information on game theory in economics, you can explore the following resources: