A game of chess or cards is considered a game of strategy wh

‘A game of chess or cards is considered a game of strategy which can be used to explain the behaviour of oligopolists’. Explain how game theory might assist economists in understanding the pricing and output decisions of oligopolists.

Solution

Game theory is just a way of representing how when a firm(oligopolist here) faces a situation. The game means finding a solution or take a decision when keeping inot account what the other person in the game does, the clasic example we all know is the prisoners\' dilemma.

here, two oligopolists in the market can be seen as a prisoner. Both of them face a situation where one firm\'s price and/or quantity depends on the others and vice versa. For example, in a Stackelberg oligopoly model of non-collusive oligopoly, both firmS know that the other acts on the basis of cournot quantity setting. Given the market information, the oligopolists can determine the action of the other firm in the same way the prisoner may have an idea as to what the other prisoner will think.

If we come to think, every decision of competitive firms, irrespective of the market, can always come under the purview of game theory. After all,, every startegic decison that involves two or more people is a game.