Game Theory

game-theory

In Game Theory the decision of a decision maker and its consequences are based on somebody else’s decisions

A ‘‘game’’ is a ‘‘strategic interaction’’ (in economics, social studies, networking, etc) between two or more ‘‘self-interested agents’’

Each agent has his/her own opinions and preferences

The ‘‘outcome’’ of a game depends on what all agents do

Example:

Suppose we have two airline companies $P_1$ and $P_2$
They are both thinking about about opening a new destination
Both consider two options: either make tickets cheap or make them expensive
Clearly if $p_1$ decides to sell cheap tickets while $p_2$ - to sell expensive tickets, everybody will buy from $p_1$

So we can depict it with the following pay-off matrix

| $p_2 \leftarrow$
$p_1 \downarrow$ | 500 | 200 | 500 | (50, 100) | (-100, 200) || 200 | (150, -200) | (-10, -10) | We see that:

if both agree on cheap tickets - both will have profits
if $p_2$ sells expensive tickets and $p_1$ cheap ones, all go to $p_1$ and $p_2$ will have losses
the same with $p_1$ and $p_1$
if both decide on expensive tickets - nobody will buy them and they both will experience losses

This is a variation of the Prisoner’s Dilemma, an example of Normal Form Game