“Game theory was first developed by economists John Neumann and Oskar Megenstern in the 1940s to analyze strategic behaviour. This idea can be applied…to any situation where people seek to work out the best possible action, taking into consideration the possible reactions of rivals” (Sayre, 2009) .
Various games related to game theory have been around as early as the 1700s. What we now know as Game Theory began in the 40s by Neumann and Megenstern publishing a book called Theory of Games and Economic Behaviour.
There are examples of game theory that exist today. Let’s look at the electronics market. Flat screen TV’s are around the same price at electronics stores. If one company lowers their TV prices then that company’s sales will increase for a while but then the competition will soon lower their prices and things will balance out again.
Different possible outcomes are shown in the form of a matrix. A classic example of the payoff matrix would be in the prisoner’s dilemma game. In this game two people are arrested. There is not enough evidence to charge either of them, so both prisoners are separated. The police instead try to get the prisoners to rat each other out. If neither prisoner says anything, then both are sentenced to a month each. If prisoner one rats out prisoner two, then prisoner two receives a one year sentence. If prisoner two rats out prisoner one, the same result will occur. If they both rat each other out, they will both receive a three month sentence
A cartel is “an association of sellers acting in unison” (Sayre, 2009) . If companies working together can restrict the supply of their products, then they can control the market price. “Cartels work to the advantage of their members only if there is no cheating among the participants” (Sayre, 2009) . Collusion works the same way as a cartel however collusion is illegal because it “can involve price or wage fixing, kickbacks, or misrepresenting the independence of the relationship between the colluding parties” (US Legal, 2012) .
Sayre, J. E. (2009). Principles of Microeconomics 6 Edition. Toronto: McGraw-Hill Ryerson.
US Legal. (2012, 12 05). Collusion Law & Legal Definition. Retrieved from US Legal: http://definitions.uslegal.com/c/collusion/
Wikipedia. (2012, 12 04). Prisoner's Dilemma. Retrieved from Wikipedia: http://en.wikipedia.org/wiki/Prisoner's_dilemma
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