Developed in 1950s by mathematicians John von Neumann and economist Oskar Morgenstern
Designed to evaluate situations where individuals and organizations can have conflicting objectives
Any situation with two or more people requiring decision making can be called a game.
A game is a description of strategic interaction that includes the constraints on the actions that the players can take and the players’ interests, but does not specify the actions that players do take.
A strategy is a course of action taken by one of the participants in a game
Payoff is the result or outcome of the strategy
Game theory is about choices (finite). While game theory cannot often determine the best possible strategy, it can determine whether there exists one.
Game theorists may assume players always act in a way to directly maximize their wins (the Homo economicus model)
Objective – Increase profits by price change
Maintain prices at the present level
Above matrix shows the outcomes or payoffs that result from each combination of strategies adopted by the two participants in the game