Economics
Game Theory
Game theory is a model that can be used to examine and explain the way that different actors in a given situation may choose to act and develop strategy, using a mathematic approach. The model looks at how players will make decisions which will be based on both the firms own position and resources as well as the way their competitors are or are expected to act. Game theory can therefore be used to help try and identify the optimal course of action (McEachern, 2009).
There are many scenarios where Game Theory will be useful; in the commercial environment game theory is most applicable in oligopoly situations
To consider the application of the theory the concept needs to be described. The situation examined is a game. For there to be a game players are required; these are the firms (Nellis and Parker, 2006). For a game to commence there need to be at least two players making decision which will impact on each other. Each set of decision made by the players is referred to as the payoff (McEachern, 2009). An effective way of examining game theory is to look at an example and the way decision impact on the different players. A good example may be the airline industry, where there are only a limited number of airlines travelling each route.
In this example there will...
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