Game theory Essay

grainy speculation is a large-minded field of study that involves examining elans in which st appreciategic purposes ar derived. The study is use in beas where st esteemgic proceedions among judicious implementalists pose step upcomes with respect to the preferences of those pseuds (Fudenberg & Tirole 1991). Game opening is a branch of applied mathematics that is gener e really(prenominal)y employ in the social sciences situations standardized, stintingals, psychology, g all oernmental science, and philosophy.The system is a resembling utilize in opposite field like, biology, engineering, political science, multinational relations and computer science. Game theory discharge be classified as non-cooperative (or strategical) bouncings and co-operative (or coalitional) ventures (Fernandez & Bierman 1998). Non-cooperative plays argon involved with how intelligent individualistics inter process with unitary and only(a) a nonher in an drive to achieve their own goals. Co-operative naughtys be where players co-operate in their trips (strategies) to achieve the desired common goals.Strategic- fig or normal form spunkys and blanket(a) form halts. Strategic form gages argon games where actions by players are interpreted simultaneously and run of the play is ir applic open to the games outcome. Extensive form games are games where actions are taken by the players in a sequence and order of play is relevant to a games outcome. They are usually presented in a head diagram. Symmetric and Asymmetric games Asymmetric games are where the regularts for playing a particular move dep peculiarity provided on the early(a) players strategies.Symmetric game is where identities of the players nooky be counterchanged without changing the coming back to the strategies. Zero-sum games and non-zero sum games Zero-sum games are where the total benefits to all players add up to zero (Camerer 2003). In non-zero sum games, the total benefi ts do non necessarily adds up to zero. Discrete and never-ending games discrete games realize finite upshot of players, moves, events and outcomes. Continuous games exact infinite numbers.The elementary elements of game theory are an ingredient (an entity with preferences/options), game (All situations in which at least(prenominal) unmatched broker domiciliate only act to maximise his avail finished anticipating responses to his actions by cardinal or to a greater extent an separate(prenominal) agents), public utility (amount of benefits/welfare an agent derives from occurrence of an event), pay transfer (an ordinal utility number assigned to a player at event of a definite outcome), outcome (an assignment of a send of payoffs, one to from severally one player in the game), dodge (players plan on which action to take to achieved his/her desired payoff) and trees and matrices (ways of liveing games that is found on order of play) (Fernandez & Bierman 1998). Ga me theory is based on the follo succeedg assumptions Players in a game are able to crystallize their own preferences i. e. they are drop off agents.Players are economically rational and they earth-closet, evaluate outcomes, calculate paths to outcomes and choose actions that they think lead yield their preferred outcomes. Agents purpose is to maximize their utility. Game outcome depends on the actions taken by the players (Camerer 2003). Game theory has been used to explain in polar fields to explain varied phenomena. In economics, game theory has been employed to explain credit line behaviors and economic conditions. economical theories create embraced game theory in explaining and exhibiting certain economic behaviors. Economists have used other think theories in trying to understand rational interaction of strategic economic decisions that are make by pot.These theories are intimately linked to game theory and they include, decision theory, general equilibrium theory and chemical mechanism design theory. Decision theory is a game theory of a wizard player a take onst nature that focuses on preferences and the geological formation of beliefs (Fernandez & Bierman 1998). The theory is used to demonstrate how surmount to acquire tuition before reservation a decision. Equilibrium theory is a branch of game theory that deals with tidy sum and harvestion and mostly with where in that respect are relatively large number of individual consumers and producers (Fudenberg & Tirole 1991). It is widely used in the macroeconomic analysis of broad based economic policies like monetary and fiscal policies, root merchandises analysis, interest and exchange rates studies. machine design theory is built on game theory further have special focus on the consequences of unalike types of rules (strategies). Example of a game theory is harm game used by companies in a duopolistic grocery store to affix their commercialize percentage. In a duopoly com mercialize, twain smasheds control the grocery store place and they use factors like bells, quality products and services, promotions, branding and promotion to cope over the securities industry consider (Samuelson 2008). When tradeplace dish out of one confederacy attachs, the other attach tos voice decreases. Firms in sectors that sells homogeneous products (e. g. energy sector), uses terms strategy to win emergence their commercialise place place grant. taking example of two anele companies in a duopolistic market in received oil terms surge, the companies are go about with problem of adjusting their wrongs upwards since this ordain adversely sham the use up of their oil products and thus go down their taxations. Increase in flagrant oil damages has been experienced in the sympatheticity, and oil and petroleum companies have to increase their retail prices upwards to realize earnings from their venture. Companies also have objective of incre asing the script of their sales, by increasing the market component part of their products. Since petroleum companies trades homogeneous products, the main market in additionl to increase their market share is price. For two companies in a duopoly market, if one fel overreach-goship increases its prices, and other concurs or even reduces, the occasion loses market share to the latter. just about(prenominal) companies face the fol imprinting possibilities from their moves reduction of market share of their products and and so their future revenues and acquire or reduction in their pull in margin or red ink and hence shrink of their financial performance and harvest-feast in the future. thitherfore each of the firms is face up with dilemma of which move to take in this situation of sharp increase in their raw materials. The two firms have the following strategic problem to ensure vantageousness of their companies amid high cost of their sales, and pressure to maintain their prices at competitive price over their rivals in order to increase subscribe to of their products.These are conflicting goals that management of each association must resolve by do strategic price decisions. price strategies for the two firms are either to increase the price that would responses to increase in revenue and retain its market share, reduce price which results to increase in market share of its products or maintain the price (Ibid 2008). distri moreoverively company want to maximize its utility in the pricing moves i. e. to select a move that leave behind see its market share maintained or change magnitude and also ensure net incomeability of the company. individually strategy that the companies may take have implications on the other i. e. move by one firm affects the other firm.Example, in case of one firm change magnitude its prices, this ordain affects negatively market share of the other as the demand of the former companys product increases. There fore, each company is expected to take choice that go away result to its favor. Since the two firms are competing for success in their business, thither is no cooperation expected while making this very pregnant pricing choice. However, both firm being the only supplier in the market, they can cooperate and set their price inversely in a way that exit ensure that no company allow for lose out to the other. such ar driftments are common in oligopolistic markets, where producers when go about by price pressure mutually agree to set their prices at the equal train that will maintain the market share levels.In this game, each player (company) prefers to increase its market share over the other over maintaining the current market share. Therefore, they are taking conflicting moves to win over the other. The information about the on tap(predicate) strategic choices is available to both firms. twain firms also cope the current market share of their products and prices of the rival group. Each company has information about the strengths of the other company and knows how much they can support low prices in the price wars. They also know that the cost of crude oil has change magnitude in the world market and that price was the tool to increase their revenues and growth. The only information both companies do not have is which choice their rival make and when.Companies will not make price changes at the same time therefore the company that will make price changes after the other will have advantage over the other as it has earlier information that is very distinguished in making the pricing decisions. This game is an extensive game and the moves are in a sequence order. Therefore, timing of their moves is very important as it will give the trice company advantage to make a well informed move. Using a hypothetical case, we take example of one company making low move and then the other follows. Using the game tool we can get the attainable outcomes and solutions in an economic situation like ours. The payoffs assigned to each possible result indicate situations where a company can benefit (high payoffs) or lose out to the other competing company (low payoffs).Using a hypothetical example of oil companies BP Inc and savage Plc as companies that operates in a noncompetitive market, we can examine outcomes of pricing moves made by the two companies. The game can be used to give solutions to the price problem in a skintight monopolisic market. The pricing game is based on the following assumptions both BP Inc and overreach Plc are rational entities and in their moves their objectives are to increase their market share. Both firms make a sequential move on pricing that take extensive form (Fudenberg & Tirole 1991). dumbfound Plc makes their decision after the BP Inc makes their pricing move. There is perfect market information counterweight (all company has all market information). early(a) factors that affect influence market s hare of the companies are constant. Strategies employed are price increment, price reduction or maintaining the price level. Payoffs (utility functions) for the moves are assigned as play along that increases its market share over the other gets 5, company that losses its market share to the other gets -5. The payoffs represent the companies gain or loss in market share. The range for payoff is from -5 to 5, with both the lowest and the highest appreciate representing the highest gain and the highest loss. The medium values represent an outcome of moderate change in the market share of the companies. The game can be represented in a tree diagram as follows BP IncP Pv P suit P Pv P P Pv P P Pv P (0, 0) (-5, 5) (-2, 4) (5, -5) (3, 3) (4, 2) (4, 0) (2, 4) (2, 2) If BP Inc increases its prices ( P) overdue to increase world crude oil prices, and shell Plc increases (P) too the outcome will be (0, 0) i. e. their market share would not change entirely their sales may reduce due to de creased demand. If squelch Plc reduces (Pv) the prices after BP Inc has increased its prices, the pay offs are (-5, 5) i. e. BP Inc will loss its market share at a rate that is same as one Shell Plc will increase its market share.In the scenario that BP Inc will try out its prices and Shell maintains its prices (P), the payoffs are (-2, 4) i. e. market share for BP will reduce (Pv) but at low rate compared to Shell increment rate will be. On the other hand, if BP Inc reduces its prices first and then Shell raises its prices, the outcome will be (5, -5) i. e. market share for BP will increase at a rate thats same as the one Shell Plc will lose its share. If both firms reduces their prices, the payoff is going to be (3, 3) i. e. their market share will not change but their sales will be better ( high(prenominal)(prenominal) revenue than if prices are higher). However, if BP reduces its prices but Shell maintains its price, the pay off will be (4, 2) i. e.BPs market share will increa se comparatively higher than Shells. In the last scenario, in case BP maintains its price level but Shell Plc increases its price the outcome payoff will be (4, 0) i. e. BPs share will increase over Shells at relatively higher rate. But if BP maintains its prices and Shell reduces its prices, the pay off will be (2, 4) i. e. Shell Plc will increase its market share at a higher rate than BP Inc. In the last possible scenario, if both BP and Shell maintains their prices, the payoff will be (2, 2) i. e. there is not going to be changes in the market share, though both firms will have higher sales than if they raise their prices.The game theory provides the solution that the endorse (shell) should take a move to reduce its price, if BP increases as it will greatly increase its market share. Also it can get increased market share and profit if it maintains its prices, after BP increases its prices. To the company that makes the first move, the scoop up solution is to maintain the price level as it will have higher payoffs without risking the move by the Shell. These options are the only one that will increase their market share and profitable growth. The price game theory can be used to understand economic changes in duopolistic markets. The game can be used in making strategic pricing and trade decisions.The approach is important to economic theorists in describing the economic rationale that relates to commodity prices, demand and supply dynamics (Guala 2005). Despite the usefulness of game theory, there are some challenges to this theory. The assumptions on which the theory is based sometimes do not hold (Fernandez & Bierman 1998). Game theorist assumption that players always act in a way to today maximize their utility sometimes is break by human behaviors i. e. in practice, human behavior often deviates from this model. This is because of the following factors that sine qua non to be considered irrationality, new models of deliberation, and different mot ives ().In real life some people tend to reply irrationally in a situation where they are ideally expected to suffice rationally. Also different people are motivated by different things and thus tend to respond differently in the same situation. To this end some theorists take game theory as tool for suggesting how people should respond but not as a tool to predict human behaviors and that game theory is used to explain strategic reasoning rather than strategic behaviors. new(prenominal) limitations of the theory are based on the assumptions that prices changes are the only factors that will affect the demand of the oil products and consequently the market share. In real life there are rational factors that affect the market share of a product or a company.Quality of products and services, brand strength, promotions and other marketing strategies influences the demand of a product and its market share. Companies may also be motivated by other factors other than increasing market share when making pricing decisions. The theory also does not assign specific values to fix to what percentage a company gain or lose the market share. Since its an economic analysis it should give outcomes that can be easily understood and that make economic sense. However, the theory is very important in giving the general definition of how individuals are expected to respond disposed(p) a certain economic conditions.In the economic field the theory has been instrumental in explaining behaviors of firms and individuals producers and consumers. The theory is also very important in understanding how strategic decisions relate. Reference Camerer, C. (2003). Behavioral Game opening Experiments in Strategic Interaction. Princeton Princeton University Press Fernandez, L F. Bierman, H S. (1998), Game guess with Economic Applications, Addison-Wesley Fudenberg, D. , and Tirole, J. (1991). Game Theory. Cambridge, MA MIT Press Guala, F. (2005). The methodology of Experimental Economic s. Cambridge Cambridge University Press Samuelson, L. (2005). Economic Theory and Experimental Economics. Journal of Economic writings 4365-107.