Game Theory-In-Depth Game Theory Insight

Example

The Prisoner's Dilemma

Scenario

Two criminals are arrested and interrogated in separate rooms. They can either confess (betray the other) or remain silent (cooperate with the other). Game Theory models this scenario to determine the outcomes based on the combination of choices, highlighting the tension between individual rationality and collective welfare.

Example

Cournot Competition

Scenario

Firms in an oligopoly decide on the quantity of goods to produce, knowing that their profit depends not only on their own production but also on the production of competitors. Game Theory helps in predicting how firms will set their production levels and prices to maximize profit, leading to insights into market dynamics and pricing strategies.

Example

Bargaining Problems

Scenario

Two parties negotiate over the division of a resource. Game Theory provides frameworks, such as the Nash Bargaining Solution, to predict the outcome of negotiations based on the parties' preferences, illustrating how rational actors can reach mutually beneficial agreements.

Example

Vickrey Auction

Scenario

An auction where bidders submit sealed bids and the highest bidder wins but pays the second-highest bid. Game Theory analyzes how this setup leads to truthful bidding, maximizing efficiency and fairness in auctions and market designs.