In this chapter we turn to Game theory and group co-operation in economics. As seen earlier, the behaviour of a firm under non-collusive oligopoly will depend on how it thinks its rivals will react to its policies. This is in terms of price, advertising and product development. Economists have developed game theory to look at this strategic approach in more depth. Game theory looks to present models of conflict and cooperation which may exist between intelligent, and rational decision-makers; actors in the game. Essentially, the idea behind games theory came from research into duopolies and the way in which two businesses will operate in the industry. In such markets, the business will behave strategically, so each business must think about what the other firm may do in a bid to decide what it should do itself. Basically, we can consider that a group of people (or teams, firms, armies, countries) are in a game if their decision problems are interdependent, in the sense that the actions that all of them take influence the outcomes for everyone. Before exploring the well-known example of game theory, the Prisoner’s Dilemma, this chapter will briefly cover the basics of game theory by using the game theory map which details the main topics mentioned within game theory. This includes but is not limited to the two forms of game theory namely, the strategic form and an extensive form.
There are several games and classes of these games have been given names. The most commonly studied game is the Prisoner’s dilemma. Other games studied in this chapter include games with multiple pure strategy Nash equilibria in which players choose the same or corresponding strategies. A brief touch on the non-cooperation game of ‘Rock, Paper, Scissors’ game, the extensive form game (game tree with payoffs), and Zero sum games. As mentioned previously, the most well-known of all these games could be seen as the Prisoner’s Dilemma. It’s use has transcended economics, being used in fields such as business management, psychology and biology, to name a few. Essentially, what a prisoner’s dilemma does is that, it describes a situation where two prisoners, suspected of burglary are taken into custody. However, policemen do not have enough evidence to convict them of that crime, only to convict them on the charge of possession of stolen goods. In the chapter, a real world and topical example of the Prisoner’s Dilemma is briefly presented - this is the example of the recent Brexit vote. Moreover, this chapter considers the idea of Iterated dominance. A normal prisoner's dilemma played repeatedly by the same participants. An iterated prisoner's dilemma differs from the original concept of a prisoner's dilemma because participants can learn about the behavioural tendencies of their counterparty. In the chapter this is best explained using an example whereby two businesses have a choice to invest to expand production. Lastly, we will examine a game with more than one player.
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