Game theory

A game is any situation in which players make strategic decisions ie decisions that take in to account each other’s actions and responses.

Example – Firms competing with each otherby setting prices.

When a firm choses a strategy, it gets an outcome in the form of rewards or benefits, which is called payoffs.

In order to play a game, a firm always follow a strategy.eg. if a firm is launching a product, it will keep the price low so as to set up market for it. So, we can define strategy as a plan of action for playing the game.

A player always tries to adopt an optimal strategy which maximizes its profit. (as a player of a game, you will always want to score highest) in the above example firm wants to set upa market fot its product. So, it will try to set up a market for its product so that it can earn maximum profit.