GAME THEORY OF ECONOMICS

Today world in full of opportunities but with the growing educated population of India grows the level of competition in the society. One is unaware about the moves of the competitors. This is where game theory is used. The subject of game theory is rational behaviour in situations of conflict-military combat,political rivalry,struggles of firms for sales and profit. It was developed by Von Neumann and Oskar Morgenstern and published in 1944, entitled, Theory of games and economic behaviour.The subject is however quite vast. In economics, situations of oligopoly and duopoly fit into this category.

The following theory can be explained through a famous example of PRISONER’S DILEMMA. It illustrates how rivals could act to their disadvantage.

Two persons A and B are arrested form a place because they robbed a bank.However, the evidence is not adequate to make the robbery charge stand unless one of them confesses their crime.Each suspect is interrogared in isolation so that their is lack of communication. Each has been asked to confess the crime and given the following options:

• If both confess each others crime then each will go to jail for 10 years.
• If both don not confess the crime then each will go to jail for 2 years.
•  If A confesses that B has done the crime and B doesnot confess about A’s crime then A will go to jail for 1 year and B will go to jail for 20 years and vice versa.

Thus each suspect has TWO strategies, either to confess the crime or not to confess it.The dilemma occurs because both of them are unaware about other’s decision. They face faces uncertainty as to the loyalty of the other and prefers to adopt 2 strategy,i.e, confessing and getting 10 years of imprisonment.By confession each prisoner is making a choice of BEST of the WORST outcomes. But, this is a worse situation as compared to “no confession” strategy in which both could get imprionment of 1 year.

Thus Prisoner’s Dilemma model by game theory provides good perspective on  strategic behaviour in the real world situation.

Click here for government certifications