The "Prisoner's Dilemma" was the gateway to the strategic viewpoint of game theory. In this assignment, you will explore the applications of game theory to economic business decisions.
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In a paper of 1,750-2,000 words, discuss how game theory is being applied to business decisions. Include the following:
1 A brief overview of game theory.
2 A description of the economic implications of game theory.
A description of how game theory is being applied in making business decisions.
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Overview of Game Theory:
Game theory is related to human conflicts and cooperation when there is competition. Game theory helps develop strategies. It refers to decision-making of competing entities in a strategic setting. It refers to an interactive situation in which independent actors share formal rules and consequences. Way back in 1838 Cournot explained the underlying rules of behavior of duopolists. This was the commencement of game theory. Currently, game theory is the study of mathematical models of conflict and cooperation between intelligent rational decision makers. Game theory was originally related to zero-sum games in which one person's gains resulted in losses of the other persons. The zero sum games were a mathematical respresentation of a situation in which each participant's gain or loss of utility is exactly balanced by the losses or gains of the utility of other participants. If the total gains of the participants are added up and the total losses are subtracted, they will sum to zero. Non-zero sum games describe a situation in which the interaction parties aggregate gains and losses and can be less than or more than zero. The zero sum game is called strictly competitive game while non zero sum games can be either competitive or non-competitive (1). Traditionally zero sum games were solved with minimax theorem which is related to linear programming or using Nash equilibrium. The Nash equilibrium is a solution concept of non-cooperative game involging two or more players in which each player is assumed to know the equilibrium. strategies of the other players and no player has anything to gain by changing only his or her own strategy. If every player has chosen a strategy and no player can benefit by changing strategies while the other players keep their unchanged, then the current set of strategy choices and payoffs is the Nash equilibrium. There are two main branches of game theory. These are cooperative and non-cooperative game theory. Non-cooperative game theory deals largely with how intelligent individuals interact with one another in an effort to achieve their own goals.
From a different perspective Game Theory is the science of strategy or optima decision making of independent and competing actors in a strategy setting. When game theory is to be applied it requires the knowledge of the independent actions, their preferences, what they know, which strategic acts they are allowed to make, and how each decision influences the outcome of the game(2).
The broader view of Game theory is that it is study of mathematical models of negotiation, conflict, and cooperation between individuals, organizations, and government. Game theory is directly applied in contract theory, economics, sociology, and psychology. The main function of game theory is to understand why an individual makes a particular decision and how the ...
The response provides you a structured explanation of game theory, and its applications in economics and business . It also gives you the relevant references.