Game theory is a systematic study of strategic interaction among rational individuals. It can also be said as a Study of ways in which strategic interactions among rational players produce outcomes with respect to the utilities of those players, none of which might have been intended by any of them It is the mathematical analysis of a conflict of interest to find optimal choices that will lead to desired outcome under given conditions.
Game theory attempts to study decision-making in situations where two or more intelligent and rational opponents are caught up under conditions of conflict and cooperation.
Game theory was generally developed by von Neumann & Morgenstern’s in 1944. It may at first seem hidden to involve mathematics in something that seems purely based on skill and chance, but game theory inreality a complex part of many branches of mathematics including set theory, probability and statistics, and plain algebra.
This results from the fact that games are dictated by a given set of rules that can be used to summarize a set of likely move which can be ranked by desirability and success, and with information available, such a set can also be constructed for the opponent, thus allowing predictions about the possible outcomes within a certain number of moves with a probabilistic accuracy.
Game theory’s main approach is to determine a rival’s most profitable counter strategy to one’s best moves and to plan the right defensive measure.
Game theory helps the firm or individuals in determining the best course of action in the view of the expected countermoves from the competitors.
The most controversial, assumption of game theory is that individuals or firms are rational. Prisoner’s Dilemma The prisoner’s dilemma is the prominent example of a game with a unique Pareto-inefficient Nash equilibrium. The main characteristics of this game is that there are substantial gains that could be attained through co-operation, non cooperation is dominant for every player in the game.
The prisoner’s dilemma is a problem in game theory that demonstrates why two people might not cooperate even if it is in both their best interests to do so. Prisoner’s dilemma forms a non-zero game in which two players may each cooperate with or defect from (betray) the other player. The prisoner’s dilemma applies to various ranges of economic and political activities. Varian, 2003 say’s “the original discussion of the game is from a situation where the two prisoners who were involved in the same crime, were questioned in separate room”.
When the players involved in the prisoner’s dilemma exhibit their dominant strategy, the outcome produces a payoff for each player which is less than the other. Nash Equilibrium The idea of equilibrium strategies which is one of the fundamental principles of game theory was developed by John F. Nash, Jr. called Nash equilibrium. Nash (1950b) formally defined “equilibrium of a noncooperative game to be a profile of strategies, one for each player in the game, such that each player’s strategy maximizes his expected utility payoff against the given strategies of the other players”.
The Nash equilibrium is an action vector from which no player can profitably unilaterally deviate. The important aspect of Nash Equilibrium is that each strategy in it is the best reply to the strategies of the other players in the game. Game Theory in Mobile Industry- A Case of Airtel and Reliance Strategy plays a crucial role in managing any successful business. To formulate successful strategies, one needs to understand the competitors’ state of mind. Game theory is a tool primarily used to solve multi-personal decision problems.
Oligopolies like mobile communications industry, with typically 3 to 6 operators, provide ample opportunities to use game theory in solving such problems. The dynamics of this industry provides enough possibilities for the application of game theory. Here is one such case of India’s top two dominant operators Bharti Airtel Ltd and Reliance Infocomm Ltd. Airtel and Reliance are engaged in a pricing war to capture more subscribers and acquire more market share. To achieve this they have implemented various calling rate plans and provided service in broadband and Digital TV with low-cost price strategy.
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