Blogging about Game Theory

Game theory. It's quite a concept, it's interesting to think about-it makes you think not only about business and how people think, but also about people in general. The main ideas behind game theory are that individuals live life as a game, only focused on their own self interest-trying to win the game. Every person for themselves, since it would be mathmatically impossible for each person to get what they want if it was up to the government. "Individuals want to maximize thier own pleasure." Game theory introduced a dark vision of the human race-everyone for themselves and not trusting of anyone else.

John Neumann and Oskar Morgenstern developed the theory by looking at it like a poker game. Every person in the game constantly thinking, guessing the next move and focusing on themselves, and only themselves to make the most money. The theory doesn't allow trust, in fact it assumes that nobody is trustworthy, much like the bluff in poker.

A short comic strip reguarding a basic principal of Game Theory

There is evidence of game theory in the current market, currently not to the extent as it seemed to be in the early 90's. In business, however I believe there will always be signs of game theory. A business will always want to thrive, always wants to make money. Businesses do this by ensuring they produce what consumers want, scanning the market constantly thinking in terms of the future, like a poker player. Obviously businesses are looking out for themselves, that's how they make money; sometimes that includes putting others' out of business, it can seem ruthless; but it is not illegal, so it's just something that happens. I don't see evidence of each business or business person being distrustful towards everyone...I think that's why we're starting to see more company's merge now too, or help eachother out, such as Starbucks and Pepsi selling eachothers' products.

The payoff matrix is used to determine the best possible action (for a company) while taking into consideration the possible reaction of any rival companies The matrix works by having each cell broken down into 2 options: one company cheats, or doesn't cheat. Also it produces a winner- what will happen if one company does cheat, or also what happens if one company doesn't cheat, or what happens if both cheat. It's tough to put into words.
Here is a payoff matrix between 2 large, recognized companies, Target and Wal-Mart.


Collusive actions occur when firms decide they don't want to be in competition with eachother, but rather take equal parts of the market, either geographically, who has more existing clients or agreeing on a fixed price. The term "cartel" is the term that describes the formal agreement of cooperation among the firms involved.


References
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http://static.environmentalgraffiti.com/sites/default/files/images/Game-theory-2.jpg