Question

Think of examples in which you, your company, a sports team, or someone else used game theory. Discuss one of them. Include in your response your observations on how game theory helped improve decision making and lead to better or more profitable outcomes. If collusion was possible, would the outcome be different?

Answer 1

Game theory is applicable in several daily matters. Lets consider a company that is attempting to merge with a smaller company. This is an example of a noncooperative game. Company 1 can choose to merge or not, these are its 2 strategies. Company 2 also has the same 2 strategies (merge,not merge). The combination of the strategies yields different payoffs for the 2 players. The application of game theory allows an idea of what the pattern of decision making should be and what is the best strategy for each player. This results in a Nash equilibrium. The Nash equilibrium would also be Pareto optimal and so results in the largest payoffs for the 2 players.If collusion occurs then the 2 companies can cooperate for a mutually beneficial outcome and even greater payoffs. Game theory thus helps in making this happen.