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Coke and Pepsi: Game Theory and Rival Strategies

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What is game theory? Explain it with a situation in which game theory is applicable, along with any description of the two rival's strategies.

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Solution Summary

This solution uses the example of Coke and Pepsi to illustrate game theory. It explains why game theory is used to analyze oligopolistic markets, and uses a payoff matrix to show why Coke and Pepsi engage in non-price competition but not price competition.

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Game theory is used to model the behaviour of oligopolies. Unlike monopolies, oligopolies have market competitors, but unlike perfectly competitive firms and monopolistically competitive firms, oligopolistic firms have so few competitors that pricing and marketing decisions made by one firm can affect all the other firms. This means that firms must take their ...

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