B. GAME THEORY

Economic life is full of situations in which people or firms or countries jockey for dominance. The oligopolies that we analyzed in the previous chapter sometimes break out into economic Warfare. Such rivalry was seen in the last century when Vanderbilt and Drew repeatedly cut shipping rates on their parallel railroads. In recent years •. Southwest Airlines tried to lure customers from its bigger rivals by offering fares far below prevailing levels. When larger airlines such as American and United were deciding how to react, they also had to take into account how Southwest would react when they reacted, and So forth. These situations typify an area of economic analysis known as “game theory.” Game. theory analyzes the way that two or more players choose strategies that jointly affect each other.

This theory, which sounds frivolous in its terminology, is in fact fraught significance and was largely developed  (1903-1957), a Hungarian- born mathematical genius, Game theory has been used by economists to study the interaction of oiigopollsts, union-management disputes, countries’ trade policies, international environmental- agreements, reputations, and a ‘host of other situations. Game theory offers insights for politics, warfare, and everyday life as well. For example, it suggests that in some circumstances a carefully chosen random pattern of behavior may be the best strategy.

A security guard should make rounds at random, not in a fixed routine. And you should occasion all}’ bluff at poker, not simply to win a pot with a weak hand but also to ensure that other players do not drop out when you bet high on a good hand.

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