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Game Theory

Game theory looks at how strategic decisions are formed and how they are implemented. It is the study of conflict and cooperation. Economists use it to understand oligopolies, which is a market with few producers whose actions impact price and their competitors. It is described as the act of looking ahead, to predict what other competitors will do, and reasoning backward, to determine what you should do in relation to the actions of others¹. The major contributors to the development of economic game theory include John Nash, Selten, and Harsanyi².

This topic includes the study of externality issues and economics of information. As a decision-maker, game theory uses mathematical methodoogy to efficiently structure and analyze problems. For example, firms use game theory to make decisions about pricing and production levels. Game theory is also applied in economics in areas such as bargaining, merger pricing, voting systems, and many other fields. Economic theory has three other branches, along with game theory, which include decision theory, general equiliubrium theory, and mechanism design theory.

Nash Equilibrium is a concept in game theory that describes a situation where all participants are trying to determine the best strategy given the strategies of the other participants². In a Nash equilibrium, none of the participating players have any incentive to deviate from their chosen strategy. In general, game theory is based on the pay-offs that come from the different decisions and strategies.



1. Chwe, Michael. (May 16, 2013). Economics, Game Theory and Jane Austen. Retrieved from
2. Introduction to Game Theory. Retrieved from

Dominant Strategy, Nash Equilibrium, and prisoners' dilemma

Every year management and labor renegotiate a new employment contract by sending their pro-posals to an arbitrator who chooses the best pro-posal ( effectively giving one side or the other $ 1 million). Each side can choose to hire, or not hire, an expensive labor lawyer ( at a cost of $ 200,000) who is effective at preparing t

Game Theory for Payoff Tables

The Tampa Tribune and the St. Petersburg Times compete for readers in the Tampa Bay market for newspapers. Recently, both newspapers considered changing the prices they charge for their Sunday editions. Suppose they considered the following payoff table for making a simultaneous decision to charge either a low price of $0.50 or

Business Game Theory: Opening New Stores

In a big city, two companies X and Y are competing for business. They have one store each. Under current conditions they share the total sales of $800,000 equally. Company X is planning to open one or two more stores, or may continue with the existing store (no new stores). Company Y can open only one additional store, or may co

Nash Equilibrium with AMD and Intel

Below is a payoff matrix for Intel and AMD for PC microprocessors. The first number per cell is AMD's profit while the second is Intel's. Intel Lower Price Same Price Higher Price AMD Lower Price -15,-15 2,6

Nash Equilibrium / Sequential GamesSequential move games

15-4. Salary Negotiation The following represents the potential outcomes of your first salary negotiation after graduation: Assuming this is a Sequential Move Game with the employer moving first, indicate the most likely outcome. Does the ability to move first give the employer an advantage? If so, how? As the employee, i

Economic Analysis: Supply and Demand, Nash Equilibrium

Question 1 The market for olive oil in new York City is controlled by two families, the Sopranos and the Contraltos. both families will ruthlessly eliminate any other family that attempts to enter the New York City olive oil market. The marginal cost of producing oil is constant and equal to $40 per gallon in either family. Th

Managerial Economics: Game Theory, Dominant Strategy, and Nash Equilibrium

Please help with the following problem. Two players, Ben and Diana, can choose strategy X or strategy Y. If both Ben and Diana choose strategy X, each earns a payoff of $1000. If both players choose strategy Y, each earns a payoff of $200. If Ben chooses strategy X and Diana chooses strategy Y, then Ben earns $0 and Diana ea

Game Theory: Do Price-matching Offers Discourage Price Cuts?

Please help with the following problem in around 200 words. Company X announces that if it reduces its price subsequent to a purchase, the early customer will get a rebate so that he or she will pay no more than those buying after the price reduction. A. If Company X has only one rival, and if its rival too makes such a

Coke and Pepsi's advertising war

Please help with the following problem. Both firms have 2 strategies available: continue the advertising war (W) or reduce their advertising budget (R). The payoffs for each strategy combination are given in the following payoff matrix. Pepsi Coke W

A managerial economics problem

Suppose there is a circle with numbered locations from 0-60 (with 0/60 at the top; like a clock in minutes). Customers are evenly distributed at locations around the circle. Three firms will locate at locations in order, so that firm F knows where previous firms located (i.e. 1 goes first, then 2 knowing what 1 did, then 3 knowi

When McDonald's Corp. reduced the price of its Big Mac by 75 percent if customers also purchased french fries and a soft drink, The Wall Street Journal reported that the company was hoping the novel promotion would revive its U.S. sales growth. It didn't. Within two weeks sales had fallen. Using your knowledge of game theory, what do you think disrupted McDonald's plans?

When McDonald's Corp. reduced the price of its Big Mac by 75 percent if customers also purchased french fries and a soft drink, The Wall Street Journal reported that the company was hoping the novel promotion would revive its U.S. sales growth. It didn't. Within two weeks sales had fallen. Using your knowledge of game theory, wh

Dominant Strategy, Nash Equilibrium

Dominant Strategy/Nash Equilibrium Firm 2 Firm 1 Price High Price Low Price High 400, 350 -80, 800 Price Low 800, -100 200,200 a) Does either firm have a dominant strategy, and if so, what it

Should you work hard on a joint project? Use game theory to predict the answer.

You and a classmate are assigned a project on which you will receive one combined grade. You each want to receive a good grade, but you also want to avoid hard work. In particular, here is the situation: If both of you work hard, you both get an A, which gives each of you 40 units of happiness. If only one of you works hard

Payoff Matrix Explained

5. From the following payoff matrix, where the payoffs (negative values) are the years of possible imprisonment of individuals A and B, determine (a) whether individual A has a dominant strategy, (b) whether individual B has a dominant strategy, (c) the optimal strategy for each individual. (d) Do individuals A and B face a pri

FIFA case is examined.

You have been hired by FIFA to advise on the pricing of tickets for the World Cup Final on 11th July 2010 to be played at Soccer City Johannesburg, a stadium with seating capacity of 88,460. You have been told that the objective is to set a ticket price that will maximise total revenue, given that the marginal cost of an extra s

game theory: airbags

According to a recent article in The Wall Street Journal, side-impact crashes are among the deadliest, accounting for nearly 10,000 deaths per year. Child safety concerns have kept auto manufacturers from making side-impact airbags standard equipment, though they are optional on most middle- to highermarket automobiles. Openly c

Strategic decision making is assessed.

Think of a time when you were involved in strategic decision making. This could be a business situation or a personal situation. It could be anything from purchasing inputs for a manufacturing firm, to dividing up household chores, to deciding whether we should we punt or go for the first down or kick a field goal? a. Discuss

Finding the best strategy in game theory

Stategy D E F A 100, 125 300,250 200 ,100 B 250, 0 500 ,500 750 , 400 C 0, -200 400, 300 -100, 350 Please explain what the dominant strategy is . Does each player have a secure strategy? What is the

Game Theory: Nash Equilibrium Problem

1. In a Nash equilibrium, each player has a dominant strategy. no players have a dominant strategy. at least one player has a dominant strategy players may or may not have dominant strategies. the player with the dominant strategy will win. 2. Nash equilibria are stable because,