game theory

Examples of game theory in the following topics:

• Game Theory Applications to Oligopoly

  • Game theory provides a framework for understanding how firms behave in an oligopoly.
  • Game theory offers a useful framework for thinking about how firms may act in the context of this interdependence.
  • For example, game theory can explain why oligopolies have trouble maintaining collusive arrangements to generate monopoly profits.
  • The prisoner's dilemma is a specific type of game in game theory that illustrates why cooperation may be difficult to maintain for oligopolists even when it is mutually beneficial.
  • The Nash equilibrium is an important concept in game theory.

• Behavioral Economics: Irrational Actions

  • Behavioral game theory: analyzes interactive strategic decisions and behavior using the methods of game theory, experimental economics, and experimental psychology.

• The Prisoner's Dilemma and Oligopoly

  • The prisoner's dilemma is a canonical example of a game analyzed in game theory that shows why two individuals might not cooperate, even if it appears that it is in their best interest to do so.
  • In the game, two members of a criminal gang are arrested and imprisoned.
  • This set of strategies is thus a Nash equilibrium in the game--no player would be better off by changing his or her strategy.
  • One traditional example of game theory and the prisoner's dilemma in practice involves soft drinks.

• Cartel Example

  • Game theory suggests that cartels are inherently unstable, because the behavior of cartel members represents a prisoner's dilemma.

• Oligopoly

  • Augustin Cournot (1801-1877), a French mathematician/economist developed the theory of monopoly and then considered the effects of two interdependent competitors (sellers) in a duopoly.
  • In 1943 John von Neumann and Oskar Morgenstern published a path breaking work on game theory.
  • Game theory has been used to try to explain the behavior of independent competitors.

• Normative and Positive Economics

  • It focuses primarily on facts and cause-and-effect behavioral relationships, including developing and testing economic theories.
  • For example, positive economic theory would describe how money supply growth impacts inflation, but it does not provide any guidance on what policy should be followed.
  • Normative economics has subfields that provide further scientific study including social choice theory, cooperative game theory, and mechanism design.

• Public Choice: Median Voters and Inefficient Voting Outcomes

  • The study of voting systems is called voting theory.
  • Voting theory is a subfield of economics.
  • For example, the Condorcet paradox can be compared to the game rock/paper/scissors.

• Introduction to the Rules of the Game

  • The structure of the rules of the games shapes the society's economic system.

• Institutions and Costs

  • The institutions define the rules of the game; provide individuals with information and some degree of certainty in their social interactions.
  • George Stigler (1911-1991) described a "capture theory of regulation. " (Stigler, 1971, Published first in 1962 with Claire Friedland) He argues that when an industry is regulated, it is in the interests of that industry to capture the regulatory agency and influence its policies.

• Classical Theory

  • Classical theory, the first modern school of economic thought, reoriented economics from individual interests to national interests.
  • Classical theory was the first modern school of economic thought.
  • During the period in which classical theory emerged, society was undergoing many changes.
  • Classical theory reoriented economics away from individual interests to national interests.
  • Adam Smith was one of the individuals who helped establish classical economic theory.