Game Theory helps in rational decision-making and studying the human conflict and cooperation in a competitive situation. Although it is applied to certain recreational games, the term ‘game’ here may not mislead you to believe that it is restricted only to rationalization in games. It is also applied in economics, political science, logical reasoning, war, computer science, etc. It is basically the science of strategy and making the best decisions in such a setting. It involves analyzing the interactive situation and making a logical selection when two independent variables share formal rules and consequences. The concept was pioneered by mathematicians John von Neumann and John Nash and economists Oskar Morgenstern. It was first used to address the zero-sum games where loss of one player is equal to the gain of another, but it is now applied to varied fields and games. For the effective use of the theory, one needs to have necessary knowledge and assumptions such as the identity of independent players, what they know, their preference, how every decision can influence the outcome of the game, etc.
So let us take a look at different types of games where game theory can be applied. These games are divided on the basis of the number of players, the symmetry of games, and cooperation among players.
When the players have to follow particular rules and strategy, and they require to adhere to their promise, it is known as cooperative game. Here they form binding commitments through negotiations and agreements between them. For example, if a company want to limit the advertisement expenditure on its harmful product like the cigarette, but not sure if other organizations would follow the same. However, the government puts a legal restriction on the same, then all of them have to follow it.
In case, where each player has its strategy and maximizes its profit, it is a non-cooperative game. These situations have finest details and more accurate results because it involves in-depth analysis of the problem.
In simultaneous games, players move or strategize at the same time and know nothing about each other’s actions. Some examples are rock, paper, scissors game, closed bid auctions, etc.
On the other hand, sequential games are the one where the player is aware of the moves of another one who has already followed some strategy. It is not necessary to have complete information, but it might have little knowledge about the previous player such as chess, open auctions, etc.
When the description is done in a matrix form, it is referred to as normal form game. The results and plan are presented in a tabular form, and it further helps to identify the strategies followed by another person and the possible outcome from it.
Extensive form game is described in a tree-like structure and represent the events that have chances to occur, and names of different players are shown on various nodes along with their possible payoffs and actions.
Let’s take an example, X wants to start a business and Z already exists in the market. So, X has two choices: he can start his company and try to survive or can drop the plan. Same way, Z also has two options: either to cooperate with X or to compete with him.
Symmetric games employ similar strategies on players, but it can exist only in short-term because, in long-term, options for players can be increased. All the decisions are based on strategies and not on players, so even if the player is changed, the payoff of it remains the same.
But, in asymmetric games strategies of every player is different, and in case of identical schemes, the benefits from them may vary according to person. Suppose, when a company wants to enter the market, it may have a different plan of action to do so from already existing ones.
In constant sum game, the sum of all the outcomes always adds up to the constant figure even if the payoffs are different.
Zero sum game is a constant sum game because here the sum of the benefits of all the players is always zero. The choices of people involved cannot increase or decrease the available resources.
And as we mentioned above the one player wins exactly the same amount the opponent loses like in poker.
But, most games as studied by theorists are non-zero games because the sum of outcomes is always more or less than zero. It can be transformed into zero games by adding a dummy player, and his losses can be compensated by the net winnings of players.
Well, this is not all. There are many other games that are included in the list such as repeated, one-shot, metagames, differential, infinite, etc. Game theory is applied for making decisions in various economic and political activities.
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