Table of contentsIntroductionAn overview of game theoryThe prisoner's dilemmaCournot duopoly modelImproving game theoryConclusionIntroductionGame theory, a mathematical tool for understanding the dynamics of strategic interactions between decision makers , constitutes the basis of our analysis. Although its theoretical foundations are based on the assumption of rationality and complete information, it is essential to recognize that real-world scenarios often deviate from these idealized conditions. Strategic decisions made by individuals, such as managers, can be driven by a variety of motivations, including the pursuit of growth, revenue maximization, or corporate social responsibility, calling into question the assumption of purely rational behavior . Furthermore, the elusive quest for complete information, in which all actors possess a comprehensive understanding of the gains associated with strategy changes, often proves unachievable in practice. Say no to plagiarism. Get a tailor-made essay on 'Why violent video games should not be banned'? Get the original essay Our investigation looks at specific gaming models, such as Prisoner's Dilemma and Cournot's Duopoly, to shed light on the consequences of strategic behavior within the field of economics. The Prisoner's Dilemma predicts that two oligopolistic firms engaged in strategic actions invariably find themselves in a suboptimal position due to their propensity to initially collude and subsequently betray each other. This prediction is consistent with historical evidence, notably observed in the US automobile market in the 1950s. Another model we explore is the Cournot duopoly, which posits that a duopoly, characterized by the presence of two companies, produces results more favorable market conditions than a monopoly. In this approach, companies engage in competition based on quantity adjustments because an increase in price would result in a decrease in their market share (Ferguson, n.d.). Although this model presents challenges in empirical testing, economists widely accept its conclusions as accurate. To improve the accuracy of the Cournot duopoly model, it is imperative to recognize information disparities between players and the existence of multiple Nash equilibria, each representing an ideal outcome for a player. This model offers valuable insights into the behavior of oligopolistic firms, elucidating their avoidance of non-price competition, perceived price rigidity, and their susceptibility to collusive temptations. Additionally, it can be applied to analyze the collaborative efforts of larger entities like governments on issues such as international trade. In this comprehensive report, we embark on a detailed exploration of game theory, an indispensable analytical tool. Game theory allows decision makers to anticipate and respond strategically to the actions of their adversaries, thereby optimizing their outcomes. The decisions made by other players exert a profound influence on overall outcomes, making the study of this dynamic area crucial to our understanding of economics. It is crucial to distinguish between non-cooperative and cooperative game theory. A striking example of the first case is the Nash equilibrium, in which no player has an incentive to change his strategy, even if he has complete knowledge of his opponents' choices (MBA Crystal Ball, n.d.). Our investigation will focus on various instances of the Nash equilibrium, including the Prisoner's Dilemma and the approach toCournot, and their profound implications for the field of economics. An Overview of Game Theory Cooperative game theory introduces a different dimension, in which players collaborate in groups and compete against each other. against other similar groups. This concept finds an interesting parallel in organizations like OPEC, where member states collaborate to restrict the supply of oil, thereby driving up prices and maximizing profits. In the following sections of this report, we will delve deeper into the fundamentals of cooperative game theory, its practical applications, as well as the inherent limitations it faces. A central tenet of game theory is the assumption that all participants act rationally, motivated by a relentless quest to maximize their game payoffs (Economics Discussion, 2019). Although this assumption forms the basis of the model, its applicability to the real world remains controversial. Real-life decisions can often be influenced by emotions or impulsive choices. For example, an investor might avoid a financially strong football team in favor of one he has supported since childhood, thereby sacrificing higher potential returns for sentimental reasons. Similarly, in the realm of oligopolistic firms, managers may prioritize factors such as growth, revenue, and corporate social responsibility over strict profit maximization. The second hypothesis posits the existence of a finite number of competitors and a predetermined set of outcomes (Ferguson, n.d.). ). In this construction, all possible outcomes must be predictable before the game begins. However, this assumption faces practical challenges. Unexpected events can disrupt expected outcomes, rendering the predetermined nature of the game moot. Furthermore, it is questionable whether companies have in-depth knowledge of their own profits and those of their competitors. As Osak (2010) rightly points out, many companies lack sufficient information to make informed strategic decisions. Furthermore, the idealized concept of complete information, in which each actor has knowledge of their opponents' payoffs (Kovach, Gibson & Lamont, 2015), does not correspond to the complexities of reality. Information imbalances often exist, giving certain actors an advantage in strategic decision-making. This variation in information availability can have a significant impact on the fairness of the game. However, the idea that players only concede when it increases their chances of winning resonates in real-world scenarios. The game show "Golden Balls" serves as an illustrative example, where participants are faced with the choice of sharing or stealing the prize money in the final round. In many cases, participants choose to share the prize, motivated by ethical considerations and a desire to avoid betraying their counterparts (Investopedia, 2019). Finally, the assumption that players can seamlessly adopt multiple strategies and adjust their prices in response to encounters with competitors proves practical. obstacles. Sector-specific regulations, such as price caps, can prevent companies from changing their prices beyond a certain threshold, making this strategic flexibility difficult to achieve in practice. The Prisoner's DilemmaOne of the essential applications of game theory, the Prisoner's Dilemma, highlights the complex dynamics of strategic interactions where an actor's decisions influence theresults for all participants. This model centers around the prediction that when two rational decision makers engage in strategic behavior to improve their individual positions, they ultimately find themselves in a collectively disadvantaged state (Tragakes, 2015). Initially, both companies in this scenario opt for a low level of risk. pricing strategy, each reaping profits of $20 million. However, they soon realize that by colluding and jointly implementing a high-price strategy, they can collectively accumulate profits of $50 million. A dilemma then follows: each company is tempted to betray the collusion agreement, reverting to a low-price strategy to seize its rival's market share and increase its individual profits by up to 70 million dollars. Furthermore, both companies believe that if they do not commit this betrayal, their competitor will seize the opportunity. Therefore, both companies lower their prices, returning to the profit margin of $20 million. Game theory posits that two firms employing strategic behavior inevitably find themselves in a suboptimal position due to their mutual relationships. This is an incentive for cheating, underscoring the idea that competition by prices in the domain of oligopolistic companies must be vigorously avoided (Tragakes, 2015). This model unravels the web of strategic interdependence that characterizes oligopolies, where conflicting incentives to cheat or collude continually shape the competitive landscape. Unfortunately, empirical testing of this prediction faces considerable challenges, as discussed previously within the confines of game theory. Nevertheless, historical examples provide compelling evidence to support the conclusions drawn from the Prisoner's Dilemma. During the 1950s, General Motors (GM), Ford, and Chrysler enjoyed dominance in the American automobile market and collectively conspired to introduce their own iterations of small cars. However, the 1970s were marked by a divergence in their strategies. Chrysler has initiated sustained price increases for its small cars, with GM and Ford planning to follow suit. In an effort to grab some of Chrysler's market share, GM opted for a lower price increase than Chrysler. This strategy was initially successful, until Chrysler decided to return to its original price, thereby negating GM's advantage. This historical example vividly illustrates the complexity of conflicting incentives to cheat and collude within the strategic interaction of oligopolistic firms, which ultimately leaves them worse off. Cournot Duopoly ModelThe Cournot duopoly model uses game theory to predict that firms operating in a duopoly market structure provide greater advantages over monopolies. This statement arises from the model's assumption that, within an industry, two companies produce a homogeneous product, act strategically without collusion, and demonstrate complete rationality. In this scenario, companies seeking to increase profits may consider raising prices, but such a strategy comes at the cost of losing market share. Therefore, Cournot's approach seeks to maximize both market share and profits by determining optimal prices (Ferguson, n.d.). These prices are mutually accepted by both firms, constituting a Nash equilibrium. Since this approach emphasizes competition through quantitative adjustments, it providesthat this market structure can better generate socially optimal quantities of goods compared to monopolies. Although this model presents valuable information, it is difficult to test empirically due to its theoretical nature. Nonetheless, economists largely accept his predictions, largely agreeing that monopolies are generally harmful from a societal perspective. In practice, monopolies are either illegal or subject to government regulation, which can lead to more favorable outcomes than those seen in duopoly settings. Cournot's duopoly model produces normative conclusions. He advises players to select options that are likely to yield better results, even if it means receiving lower rewards with reduced risk. Additionally, he highlights the benefits of forming alliances and engaging in cooperative game theory, as this can turn potential adversaries into allies. Improving Game Theory Improving game theory to address its inherent challenges would be helpful in making it more relevant and beneficial to various stakeholders in society. . The model is designed to analyze individual behavior in strategic situations where adversaries have limited information about each other (Kovach, Gibson & Lamont, 2015). Although this notion may correspond to the practices of many oligopolistic companies striving to protect information from their competitors, it is not always valid in the real world. In such cases, the accuracy of the model decreases and it becomes less effective in providing solutions to complex real-world conflicts characterized by information disparities among key actors (Kovach, Gibson, & Lamont, 2015). One avenue for improvement could be to develop separate game models for each player, taking into account differences in information, beliefs and understandings within the group. Another limitation lies in the model's assumption that players systematically act strategically and take into account the responses of their competitors. In reality, not all managers operate with such a mindset, which makes some conclusions of the model inapplicable. Furthermore, effective use of the model depends on the ability of managers to discern the expected positive and negative outcomes of their actions. However, this often proves difficult since “most companies do not have sufficient knowledge of their own profits, let alone those of their competitors” (Osak, 2010). Unfortunately, these inherent challenges remain insurmountable, necessitating a growing demand for empirical testing of these theories. However, conducting such tests is extremely difficult due to the model's highly simplified assumptions (Reinganum, 1984).ConclusionGame theory significantly enriches our understanding of oligopolistic firms by highlighting their complex network of interactions. Every business decision made by one company can ripple across the entire industry, profoundly affecting the profits of others (Osak, 2010). The model allows companies to formulate optimal strategies based on pre-calculated payoff matrices, providing valuable insights into their behavior, including incentives for collusion and cheating. This understanding extends to the operations of cartels like OPEC and various forms of tacit collusion between oligopolistic firms. Furthermore, game theory finds relevance in government decision-making, particularly in the context of international trade. Governments often face dilemmas/