Game Theory
The mathematical study of strategic decision-making among rational actors.
What is Game Theory?
Game theory is a branch of mathematics and economics that analyzes strategic interactions where each participant's outcome depends on the choices of all others. It models situations where rational actors must anticipate how others will respond to their decisions. Key concepts include the Nash equilibrium (a stable state where no player benefits from changing strategy unilaterally), the prisoner's dilemma (where individually rational choices produce collectively suboptimal outcomes), and zero-sum versus non-zero-sum games. Game theory has broad applications in economics, business strategy, auction design, corporate negotiations, antitrust analysis, and evolutionary biology. John Nash, John von Neumann, and John Harsanyi are among its most influential contributors.
Example
Two competing airlines must independently decide whether to discount fares or hold prices. If both hold prices, each earns $10 million profit. If both discount, each earns $5 million. If one discounts and the other holds, the discounter earns $14 million and the holder earns $2 million. The dominant strategy for both is to discount — resulting in $5 million each — even though mutual cooperation at full fares would yield $10 million each. This prisoner's dilemma explains why price wars persist even when they are mutually destructive.
Source: Investopedia — Game Theory