The Application Of Game Theory In Business

Game theory is one of the topics in economics which has made the subject important in many different fields. The application of game theory can be found in international trade, industrial relations, politics, business, etc. However, the topic of game theory is not taught at the pre-university level. Nevertheless, one can learn game theory by taking economics tuition with a good economics tutor. Although most economics tuition centres in Singapore provides economics tuition which caters for junior college students, there are some who include game theory in their curriculum. Therefore, it is important to enquire with the economics tutor the detail of their curriculum. I would give a brief exposition of the most famous concept in game theory which is known as the prisoner’s dilemma.

Prisoner’s Dilemma in Theory

In layman’s terms, two men were arrested by the police and brought back to the police station. They were suspected of committing a crime. However, the police had difficulty in getting the two men to confess to the crime. Therefore, the police came up with a strategy. In economics tuition, one can learn different types of strategies, or policies, to deal with different economic problems. However, it is important to take economics tuition from an economics tutor with a good track record. They put the two men in two separate cells. The purpose was to prevent them from communicating with each other. The police then gave each of the two men two options; to confess or not to confess to the crime. If a man confessed to the crime, he would get a jail term of 5 years if the other man also confessed to the crime. However, if the other man did not confess to the crime, the first man would be given a jail term of one year as he would be considered to be repentant. In contrast, if a man did not confess to the crime, he would get a jail term of 10 years if the other man confessed to the crime as the first man would be considered to be unrepentant. However, if the other man also did not confess to the crime, each man would get a jail term of two years as the police would fabricate a crime to charge them. In this case, it is always in the interest of a man to confess to the crime as it will get him a shorter jail term, regardless of the action of the other man. However, this will lead to a sub-optimal outcome for the two men collectively.

Prisoner’s Dilemma in Practice

Assume a market with two firms. Such a market is commonly called a duology which is a special case of oligopoly. Further assume that each firm can charge either a high price or a low price. If a firm charges a low price, it will make a supernormal profit of $500,000 if the other firm also charges a low price. However, if the other firm charges a high price, the first firm will make a supernormal profit $1,000,000 as it will attract consumers from the other firm. The concept of supernormal profit can be learned in economics tuition with a good economics tutor. One may contact Economics Cafe for economics tuition if they wish to get a good economics tutor to explain the concept of supernormal profit which is s a topic in the chapter of market structure. The Principal Economics Tutor at Economics Cafe is Mr. Edmund Quek. In contrast, if a firm charges a high price, it will not make any supernormal profit if the other firm charges a low price as it will lose consumers to the other firm. However, if the other firm also charges a high price, the first firm will make a supernormal profit of $750,000. In this case, it is always in the interest of a firm to charge a low price as it will get the firm a larger supernormal profit, regardless of the action of the other firm. However, this will lead to a sub-optimal outcome for the two firms collectively.

Benjamin Tay

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