Game theory is the study of human conflict and cooperation within a competitive situation. In some respects, game theory is the science of strategy, or at least the optimal decision-making of independent and competing actors in a strategic setting. The key pioneers of game theory were mathematicians John von Neumann and John Nash, as well as economist Oskar Morgenstern.
Game theory creates a language and formal structure of analysis for making logical decisions in competitive environments. The term “game” can be misleading. Even though game theory applies to recreational games, the concept of “game” simply means any interactive situation in which independent actors share more-or-less formal rules and consequences.
The formal application of game theory requires knowledge of the following details: the identity of independent actors, their preferences, what they know, which strategic acts they are allowed to make, and how each decision influences the outcome of the game. Depending on the model, various other requirements or assumptions may be necessary. Finally, each independent actor is assumed to be rational.
Game theory has a wide range of applications, including psychology, evolutionary biology, war, politics, economics and business. Despite its many advances, game theory is still a young and developing science.
Game theory brought about a revolution in economics by addressing crucial problems in prior mathematical economic models. For instance, neoclassical economics struggled to understand entrepreneurial anticipation and couldn’t handle imperfect competition. Game theory turned attention away from steady-state equilibrium and toward market process.
In game theory, every decision-maker must anticipate the reaction of those affected by the decision. In business, this means economic agents must anticipate the reactions of rivals, employees, customers and investors.
SCM and GT
GT is a strategic decision making theory which looks at the conflicting and cooperative behaviours of two intelligent and rational decision makers (supply chain firms in our case) for different scenarios (i.e.: win-win, win-lose, lose-win and lose-lose) to help with the strategic decision making.
