Game Theory Applications in Business

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Game Theory Orton K.C. Tsun April 1, 2012 Introduction As individuals, we make decisions throughout the day weighing the cause and effect, cost and benefit, risk and impact of our actions on ourselves and upon others. When taken to a larger scale, as the manager of a team, the CEO of a corporation, or the leader of a nation, the decisions exponentially increase in impact and importance. Game Theory, the analysis of the concepts used in social reasoning when dealing with situations of conflict (Rubinstein, 1991), is one of many methods used to provide rational strategies towards the making of decisions. Game theory provides logical and mathematical models towards decision-making which are applied to real-life situations such as…show more content…
The objective is to determine the most profitable (revenue minus cost) product based on its attributes relative to the market but also accounting for what the competition is selling comparably. Because of the complexity there are a great deal of parameters to take into consideration as part of the “game form” including the number of manufacturers in the market, number of products offered by the manufacturer, number of products on the market, number of segments in the market, engineering costs of a given product by a manufacturer, market demand for a given product, market share of the manufacturer (brand influence), and the probability of another manufacturer producing a similar product. One assumption factored into the game is that strategically a competitor would consider not entering a market (production of a given product) saturated with similar products. From the above mentioned examples, we can validate that Game-Theoretic modeling plays an invaluable role as a metaphorical approach to strategic management (Saloner, 1991). Game Theory provides measurable simulations of what could happen to enable rationalization of the best course of action without incurring the heavy costs of a true trial and error method. With that said, as noted in our introduction, while game theory
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