Your assignment is to prepare and submit a paper on game theory as a logical study of the behavior between two firms. An example of Game Theory would be if Company X makes product X, and Company Y makes product Y. A third company, Company XY, buys product X and Y to produce product XY. Company X, Company Y, and Company XY would be named as players under the Game Theory. If Company X raises the cost of their product, Company XY is affected. The rise in product X’s cost could even affect Company Y, if Company XY’s chooses to increase the price of their product with the result of lower sales of product XY. Game Theory has a few elements that are important to mention. As mentioned before players are one element, the other elements include payoffs, actions, and rules. Players are the actual firms. Payoffs are the rewards or punishment of the players in the game. In the scenario above, Company X could have been punishing Company XY or rewarding Company Y, depending on the circumstances. Actions are the decisions made by the players. The rules define the players, actions and payoffs. This makes up the basics of Game Theory.
An oligopoly is a couple of large suppliers controlling a particular market. The market concentration is normally high. Companies encompassing an oligopoly produce brand quality products. Barriers exist for firms on the outside an oligopoly, due to the necessity of brand quality products the firms on the inside of the oligopoly produce. The interdependence between companies in an oligopoly is vital. Each company in an oligopoly must anticipate what the other companies/players will decide concerning investments, prices, or any other important business decisions. Economists seek to predict these decisions by using Game Theory.
Game Theory helps players logically figure out the decisions other players will make. Game Theory not only helps predict players decisions, but has an impact on politics, other businesses, pricing of products and services, locations for industrial plants, and even enviormental issues if the prime location for an industrail plant is near an endangered species.