Game theory
Topic: Market Structures, Market Failure and Competition · NCERT: Beyond NCERT
Meaning
Game theory studies strategic interaction: situations where what one player gets depends on what the others choose. Every game has three elements:
- players: the decision-makers;
- strategies: the choices open to each player;
- payoffs: what each player gets from each combination of choices.
A central idea is the Nash equilibrium (John Nash, 1950; Nobel 1994, shared with Harsanyi and Selten). It is a set of choices where no player can gain by changing strategy alone. Game theory is used to study oligopoly, cartels, bargaining and international negotiations.
Example
In climate negotiations, each country prefers that others cut emissions while it keeps polluting. This is free riding on a global public good, meaning benefiting without paying. If every country reasons this way, emissions stay too high and all countries end up worse off. Game theory explains this trap. It also shows that cooperation is easier when countries deal with each other again and again.
Don't confuse with
- Decision theory: one person choosing against fixed conditions, such as the weather. In game theory, the other side is also choosing and reacting.