Game theory is a mathematical representation of situations in which two or more players strategize and make choices that affect the choices and outcomes for other players. There are many forms of game theory, and in a business environment it is defined by boundaries, players, and a set of rules within which outcomes are determined. Game theory is often used in marketing to describe the results of strategies depending on strategies other participants in the market employ. Understanding the rules and theory of game theory, which occur in every business, are essential for success. Consumers, entrepreneurs and managers, regulators, courts, and other participants contribute to a market’s design, directly or indirectly. Any change, either within the company or outside the company, will be reflected throughout the business system. In game theory, nothing is fixed. The marketplace is constantly evolving, and players are constantly creating new markets. Buyers and sellers do not take products or prices as given. Game theory differs from conventional economic assumptions by which consumers are thought to behave in simple stimulus-response, i.e., sellers determine prices and consumers respond accordingly. Mathematicians John Von Neumann and Oskar Morgenstern first developed game theory. Their theories were restricted to games in which no players could gain except at the expense of others. In the process of the game, each player strategized in order to gain what he or she wanted out of the interaction. For example, when purchasing a car, buyers go to the car dealership looking for the lowest price they can possibly obtain, while the salesperson will ask for a higher price than the minimum they will accept up to the point when he fears they will walk away. Buyers will continue to negotiate as long as they believe the seller still might come down on their price. Nobel Prize–winning economist John F. Nash (portrayed in the Academy Award-winning film A Beautiful Mind) clarified the distinction between cooperative and uncooperative games. In an uncooperative game (unlike cooperative games), there are strategies that are used by players in such a way that neither player can benefit by changing the strategy if the strategies of the other players remain unchanged. Nash introduced the concept of “bargaining negotiation,” or agreement between two players to produce an outcome, with both participants believing they will benefit from the ultimate outcome.
See also ZERO-SUM GAME.