GAME THEORY IN
ECONOMICS
Game theory is widely regarded as having its origins in the mid-nineteenth century with the
publication in 1838 of Augustin Cournot's Researches into the Mathematical Principles of the
Theory of Wealth, in which he attempted to explain the underlying rules governing the behavior
of duopolists. However, it was with the publication in 1944 John V Neumann and Oskar
Movgenlern's The Theory of Games and Economic Behavior that the modern principles of game
theory were formulated. Game theory has been widely applied to the behavior of producers
with a few or only one competitor.
What is a game?
All games have the following:
• Rules, which govern the conduct of the players
• Pay-offs, such as win, lose, or draw
• Strategies, which influence the decision-making process.
In applying game theory to the behavior of firms we can suggest that firms face several strategic
choices which govern their ability to achieve the desired pay-off, including:
• Raise
• Lower
• Hold
Decisions on products, such as whether to:
• Keep existing products
• Develop new ones
Decisions on price and output, such as whether to:
• Raise
• Lower
• Hold
Decisions on products, such as whether to:
• Keep existing products
• Develop new ones
Decisions on promoting products, such as whether to:
ECONOMICS
Game theory is widely regarded as having its origins in the mid-nineteenth century with the
publication in 1838 of Augustin Cournot's Researches into the Mathematical Principles of the
Theory of Wealth, in which he attempted to explain the underlying rules governing the behavior
of duopolists. However, it was with the publication in 1944 John V Neumann and Oskar
Movgenlern's The Theory of Games and Economic Behavior that the modern principles of game
theory were formulated. Game theory has been widely applied to the behavior of producers
with a few or only one competitor.
What is a game?
All games have the following:
• Rules, which govern the conduct of the players
• Pay-offs, such as win, lose, or draw
• Strategies, which influence the decision-making process.
In applying game theory to the behavior of firms we can suggest that firms face several strategic
choices which govern their ability to achieve the desired pay-off, including:
• Raise
• Lower
• Hold
Decisions on products, such as whether to:
• Keep existing products
• Develop new ones
Decisions on price and output, such as whether to:
• Raise
• Lower
• Hold
Decisions on products, such as whether to:
• Keep existing products
• Develop new ones
Decisions on promoting products, such as whether to:
