IndexSummaryIntroduction:Key Assumptions:The Reality of Assumptions:Model Predictions and Its AccuracyPrisoner's DilemmaCournot Duopoly ModelNormative ConclusionsImprovements to the ModelPractical ImplicationsConclusionExecutive SummaryGame theory examines the behavioral decision making of individuals in situations where they are against an opponent. Cooperative game theory is when players form groups to compete against other groups. Non-cooperative game theory is when the player has no incentive to change strategy, even if he knows the choices available to his opponent. The model assumes that players are rational and that there are only a certain number of predetermined outcomes. However, these assumptions are not always valid in real life as individuals make impulsive and emotional decisions. Changing circumstances due to unexpected events can also change the results. The Prisoner's Dilemma demonstrated that strategic behavior between competitors will always end up getting worse due to their incentive to cheat through collusion and have a win-win situation between them. This concludes that price competition between oligopolistic firms should be avoided. The Cornet Duopoly model shows that competitors can maximize their market share and profits by finding optimal prices. However, this model is not perfect and has room for improvement. It is believed that players always act strategically and think about the response of their competitors, which is not always the case as not all managers think with this mindset. This model can only be effective when managers can make sense of the positive and negative profits expected from their actions. In reality, this is difficult since many companies tend not only not to know their competitors' profits, but also their own. Say no to plagiarism. Get a tailor-made essay on "Why Violent Video Games Shouldn't Be Banned"? Get an Original Essay Introduction: In this report, we will take an in-depth look at an economic model known as game theory. This theory analyzes your opponent's reactions to help you make the decision to give you the most favorable outcome. Decisions made by other players in the game can change the outcome for all individuals involved and, therefore, can affect the player's outcome. There are two different types of game theory, non-cooperative and cooperative. An example of non-cooperative game theory is the Nash equilibrium, where no player has an incentive to change strategy, even if he knows all of his opponent's choices. We will explore multiple examples of the Nash equilibrium known as the prisoner's dilemma and the Cournot approach, and its implications for the study of economics. Cooperative game theory is one in which players form groups and compete against other groups. This can be compared to cartels like OPEC as this organization works together to keep the supply of oil low between member states and therefore keep the price high to maximize profit. In this report, we will discuss the fundamental elements of this theory and its real-life applications, as well as its flaws. Key Assumptions: The key assumption of game theory is that all players are rational, meaning that they all strive to maximize their payoffs within the game. While this assumption may make the model confined to the real world, it is critical to justify why players make the decisions they do. The next assumption is that there is a finite number of competitors and acertain number of predetermined results. It is important that all outcomes can be predicted before the match begins. Players will do their best to maximize their winnings and will only make concessions when it increases their risk of winning. Finally, all players can adopt multiple strategies and everyone is aware of the different rules of the game. The Reality of Assumptions: The assumption that all players act rationally does not hold true in real life as individuals may make decisions based on impulses or emotions. For example, an individual might refuse to invest in a football team that is more likely to win a competition and essentially give the best return with lower risk in exchange for a team he has supported since childhood. In cases of oligopolistic firms, managers may choose to neglect profit maximization and instead base their decisions on other factors such as maximizing growth, revenue, and corporate social responsibility. Furthermore, the assumption that all outcomes can be predicted before the game begins is unrealistic. for multiple reasons. First, unexpected events can always occur in real life that could change the outcome of the game. Second, “most companies will not have sufficient knowledge of their own profits, let alone those of competitors, so, in cases like this, managers cannot make strategic decisions. Furthermore, it is difficult to obtain complete information in real life, where "every player is aware of his opponent's earnings". One player may have more information than another, so he may be in a better position to make a strategic decision than his opponent. The assumption that players will only make concessions when it increases their risk of winning is true in real life. The TV game “Golden Balls” is an example of this where in the final round players have the option to split or steal the money. In many cases, contestants are happy to share the prize because they would feel bad about themselves if they screwed the other player and took all the money. Finally, the assumption that players would be able to adopt multiple strategies and change their prices in response to their competitors may be more difficult to realize in real life. This could be due to any legislation within the industry, such as price caps, which could prevent companies from increasing prices beyond a certain point. Predictions of the model and its accuracy The prisoner's dilemma The model is concerned with predicting the outcome of a game in which players are influenced by the decisions of their opponents. An example of this is the prisoner's dilemma. This model predicts that “two rational decision makers who attempt to improve their situation by using strategic behavior always end up making their situation worse.” profits of 20 million dollars. They eventually realize that by colluding and adopting a high pricing strategy together, they can earn profits of $50 million. However, each company now faces a dilemma: the incentive to violate the agreement and adopt a low-price strategy to capture the opponent's market share and increase profits by up to $70 million. Every company also thinks that if it doesn't do it first, its opponent will beat it to the punch. Both cut prices and profits are reduced to $20 million. Game theory predicts that two firms engaging in strategic behavior will always end up worse off due to their incentive to cheat, so it concludes thatPrice competition between oligopolistic firms should be strongly avoided. This model also reveals the strategic interdependence that exists between oligopolies and their competing incentives to cheat or collude. Unfortunately, this prediction is not easily testable due to the inherent limitations of game theory discussed above. However, there have been cases that indicate that the conclusions of the prisoner's dilemma were accurate. In the 1950s, GM, Ford, and Chrysler dominated the U.S. auto market and colluded with each other when introducing their own versions of small cars. During the 1970s, Chrysler continually introduced sustained increases in the price of its small cars, which were to be followed by GM and Ford. However, in an attempt to take some of Chrysler's market share, GM raised prices by a smaller margin than Chrysler. They were successful until Chrysler reduced the price to the original price. This shows how competing incentives to cheat and collude due to strategic interdependence between oligopolistic firms will always leave them worse off. Cournot Duopoly Model The Cournot duopoly model also uses game theory to predict that firms that have a duopolistic market structure are more beneficial to society. compared to monopolies as they produce greater quantities at lower prices. Suppose that within an industry there are two firms that produce a homogeneous product, that act strategically, do not collude, and are completely rational. If any of these firms wants to increase their profits, they can do so by raising prices. However, increasing profitability through higher prices results in a loss of market share, which is why "the Cournot approach attempts to maximize both market share and profits by setting optimal prices." This price would be accepted by both firms, making it a Nash equilibrium. Because this approach assumes that firms compete through changes in quantities, it predicts that this market structure is better able to produce socially optimal quantities of goods than monopolies. Although this model is not easily testable, its predictions are considered accurate because Economists generally agree that, from society's perspective, it monopolizes the worst market structure. However, in real life, monopolies are illegal or regulated by the government, so they can produce more favorable market outcomes than those of companies within a duopoly. Normative Conclusions The word normative means following a set of rules in the context of one's behavior. The model generates some normative conclusions. The player should follow the option that is most likely to give him the best outcome, even if it means getting a lower reward but with less risk. Furthermore, by forming groups and conducting cooperative game theory, you should have a better chance of achieving a good outcome as you will turn potential enemies into allies. Improvements to the Model Improving game theory would transcend some of the challenges it currently faces. In this way, it can reach or produce conclusions that would be more useful to different stakeholders within the company. Game theory is used to answer how individuals behave in strategic situations when "adversaries know very little about each other". While many oligopolistic companies may adapt to this notion as they attempt to protect information from their rivals, this assumption may not always hold in real life. In these cases, the model of the theory of.