Game theory in business decisions

Contact Us If you still have questions or prefer to get help directly from an agent, please submit a request. Please fill out the contact form below and we will reply as soon as possible. The American economic review , This paper studies the motivations behind cooperation or noncooperation between different players in an industry. It notes that, people are always motivated to hurt those who hurt them and help those who offer help.

Any outcomes that go against these thoughts are referred to as fairness equilibria. The paper concludes that payoffs are maximum when players work together and minimum when players work against. Game theory in the social sciences: concepts and solutions , Shubik, M. In Webers paper, he observes that human beings are not always motivated to increase profits whenever they make decisions but there are historical explanations to this form of motivation.

While the paper agrees that Webers work needs to be reviewed, it dismisses some of the arguments in the paper to give readers a thorough grounding when debating. Use game theory to shape strategy , The evolution of the labor market for medical interns and residents: a case study in game theory , Roth, A. Journal of political Economy , 92 6 , This paper studies the changes that took place in in the labor market involving medical interns.

The paper looks at how the changes occurred and the problems that came with these changes. It offers a platform for the study of such markets and offers an analysis that explains modern problems facing the market.

The paper also analyzes the history of ideas and how different players in an industry arrive at ideas. Superpower games: Applying game theory to superpower conflict , Brams, S. This paper examines the interactions between superpowers. It analyzes how different countries in power arrive at decisions and how these decisions affect their economic progression.

It shows how game theory applies when resolving economic conflict between superpowers. Comments on the interpretation of game theory , Rubinstein, A. Econometrica: Journal of the Econometric Society , This paper is a description of the game theory. It views game theory as a means of dealing with conflict between players and not as a means to predict behavior.

The paper starts by analyzing strategy and how it is applied in different industries. The payoff matrix is shown below figures represent profit in millions of dollars. In this case, it makes sense for both companies to work together rather than on their own. This is an extensive-form game in which two players alternately get a chance to take the larger share of a slowly increasing money stash.

The centipede game is sequential since the players make their moves one after another rather than simultaneously; each player also knows the strategies chosen by the players who played before them. The game concludes as soon as a player takes the stash, with that player getting the larger portion and the other player getting the smaller portion. But if B passes, A now gets to decide whether to take or pass, and so on.

This is not intuitively surprising given the tiny size of the initial payout in relation to the final one. This non-zero-sum game, in which both players attempt to maximize their own payout without regard to the other, was devised by economist Kaushik Basu in If both write down the same value, the airline will reimburse each of them that amount. The process of backward induction, for example, can help explain how two companies engaged in a cutthroat competition can steadily ratchet product prices lower in a bid to gain market share , which may result in them incurring increasingly greater losses in the process.

This is another form of the coordination game described earlier, but with some payoff asymmetries. It essentially involves a couple trying to coordinate their evening out. Where should they go? The payoff matrix is shown below with the numerals in the cells representing the relative degree of enjoyment of the event for the woman and man, respectively.

For example, cell a represents the payoff in terms of enjoyment levels for the woman and man at the play she enjoys it much more than he does. Cell d is the payoff if both make it to the ball game he enjoys it more than she does. Cell c represents the dissatisfaction if both go not only to the wrong location but also to the event they enjoy least—the woman to the ball game and the man to the play. The dictator game is closely related to the ultimatum game, in which Player A is given a set amount of money, part of which has to be given to Player B, who can accept or reject the amount given.

The catch is if the second player rejects the amount offered, both A and B get nothing. The dictator and ultimatum games hold important lessons for issues such as charitable giving and philanthropy. If both refrain from price cutting, they enjoy relative prosperity cell a , but a price war would reduce payoffs dramatically cell d. However, if A engages in price-cutting i. The worst possible outcome is realized if nobody volunteers.

For example, consider a company where accounting fraud is rampant but top management is unaware of it. Some junior employees in the accounting department are aware of the fraud but hesitate to tell top management because it would result in the employees involved in the fraud being fired and most likely prosecuted.

Being labeled as a whistleblower may also have some repercussions down the line. It is called game theory since the theory tries to understand the strategic actions of two or more "players" in a given situation containing set rules and outcomes.

While used in a number of disciplines, game theory is most notably used as a tool within the study of business and economics. The "games" may thus involve how two competitor firms will react to price cuts by the other, if a firm should acquire another, or how traders in a stock market may react to price changes.

In theoretic terms, these games may be categorized as similar to prisoner's dilemmas, the dictator game, the hawk-and-dove, and battle of the sexes, among several other variations. In fact, when shopping for a big-ticket item such as a car, bargaining is the preferred course of action from the consumers' point of view.

Otherwise, the car dealership may adopt a policy of inflexibility in price negotiations, maximizing its profits but resulting in consumers overpaying for their vehicles. Understanding the relative payoffs of cooperating versus defecting may stimulate you to engage in significant price negotiations before you make a big purchase. Nash equilibrium in game theory is a situation in which a player will continue with their chosen strategy, having no incentive to deviate from it, after taking into consideration the opponent's strategy.

Cournot competition, for example, is an economic model describing an industry structure in which rival companies offering an identical product compete on the amount of output they produce, independently and at the same time. It is effectively a prisoner's dilemma game. Game theory can be used very effectively as a tool for decision-making whether in an adversarial, business, or personal setting.

Princeton University Press. The Nobel Prize. Behavioral Economics. Business Essentials. Actively scan device characteristics for identification.

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