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A TERM PROJECT
Submitted to
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Ilkin Jafarov
in
05.30.2017
ABSTRACT
In this report I will talk about why game theory is important and how it is effective in
business field. To do this I will write about the role of game theory in history of economic and
information systems. Then I will show how game theory works in business field and which game
forms it is divided into. The report will give definition of the game forms which most used in
business and show dominance of the strategies and show how game theory is important in
TABLE OF CONTENTS
INTRODUCTION............................................................................................................. 6
CONCLUSION ............................................................................................................... 17
REFERENCES ................................................................................................................ 18
LIST OF FIGURES
Figure 1. [The advertisements recommended by the YouTube and the websites gain.] ..... Error!
LIST OF TABLES
INTRODUCTION
money. But the decision made by each individual and company that wants to succeed in such an
environment determines whether other individuals will also be successful. Game theory, created
by Austrian economists Oskar Morgenstern and Hungarian John Von Neumann in 1944,
according to Wikipedia, analyzes all the possibilities and mathematically reveals how successful
each individual or company will be and how it will affect other individuals. Game theory
environments are "games". The theory divides the games into groups such as strategic, extensive
etc. to analyze the strategies and results of the players. And it predicts the successes and gains of
individuals and companies and their good or bad effects on other individuals and companies.
This report will be about game theory in business field of operations research. Its purpose
is to present the relationship between game theory, business and operation research. The report
will explain how important game theory is in business and how companies set their own
strategies. Although game theory is a mathematical theory and contains a lot of complex
formulas, these aspects have been avoided in the report. Only introductory information about
game theory will be provided. This report will be beneficial for industrial and management
engineering students.
The parts of the report discuss history, impact and definition of game theory, the
relationship between information systems and the theory, definition of games, strategic form of
games and payoff, extensive form of games, dominance of strategies and quality choice. The
sections on game theory and information systems, explains what is game theory and
its importance. The sections on game forms describe how the theory analyzes the strategies of
the companies.And the final section on strategies and quality describes how companies need to
choose strategies and the relationship between companies and the customers, depending on the
Under this heading I am going to explain what game theory is and talk about its history
and the impact of game theory in information systems and general game forms.
Game theory is a field used in statistical science, social sciences, biology, engineering,
political sciences, computer science and philosophy. The concept of game theory is used when
agents interact with one another. These agents can be individuals or companies. Even if the
theory was originally developed to solve contests where an individual's earning is at the expense
of the other, he has begun to examine a vast field of interaction based on many aspects. Aumann
(1981) states Game theory is a sort of umbrella or "unified field" theory for the rational side of
social science, where "social" is interpreted broadly, to include human as well as non-human
Although some progress has been made earlier, game theory began with the book Theory
of Games and Economic Behavior written by John von Neumann and Oskar Morgenstern in
1944. The theory was developed by many academics in the 1950s. Game theory has been
accepted as an important tool in many fields. In the economy, eight game theorists received the
Nobel Prize. Game theory has recently been used in artificial intelligence and cybernetics as well
History of game theory. Retrieved May 08, 2017 from World Wide Web
http://cassmba8.weebly.com/john-nash-a-beautiful-mind.html
Coherence of game theory and mathematical foundations are the most important tools for
individuals interact. For example, you might want to have active bidding rules for the auction on
For any decision-maker, game theory is a methodology for analyzing and determining the
situation as a game requires the ordering of decision makers and their strategic options, taking
into account the preferences and reactions of the players. The discipline used to create such a
model has the potential to provide a clearer and broader perspective on the situation to a decision
maker player.
For example, if a decision maker watches a few videos on YouTube website, he will see
the website recommends some videos. YouTube creates a strategy by understanding which
videos the decision-maker watches, and according to this strategy, the website will recommend
videos to the decision-maker in his area of interest. Also, when decision maker use other internet
sites, YouTube can recommend the ads of internet sites in the same and similar categories and
Figure 1. The advertisements recommended by the YouTube and the websites gain.
James, M. (2015). Facebook to take on YouTube with its new video ad feature. Retrieved May
ad-feature/
The goal in game theory is to describe each interactive situation as a game. Game theory
analyzes all players' preferences, knowledge, strategic activities and shows how players are
influenced. Games are divided into two groups as cooperative and non-cooperative. Cooperative
games determine the profits that any individual group can achieve through cooperation. Games
that host non-cooperating individuals are called non-cooperative games. Hahn (1992) states that
in such games, individuals make decisions according to their interests (p. 214). If we think of
companies as non-collaborators, we can see that cooperative games are valid in business.
Because in the real world all companies are in competition with one another, and the decisions
they make, and the strategies they follow, determine their winnings. Non-cooperative games are
divided into two groups as strategic form and extensive form. A game in strategic form
determines the strategies and possible options of the players. The extensive form is more detailed
2. GAME FORMS
Under this heading Im going to explain about game forms and dominance of strategies.
In game theory, strategic form is a way of defining a game. Strategic form is generally
used for simultaneous games and allows to analyze the results of decisions made at different
times in a game. Hussein states (2008) An outcome is represented by a separate payoff for each
player, which is a number that measures how much the player likes the outcome. (p. 26)
For example, suppose there is a strategic game between two players. These players are
two companies that produce shoes in a city with a penetration of 100,000. Each player has two
Assume the price of each shoe are 10 dollars. And these two companies have the same
capacity to produce products. But each company lacks a material for production. If the
companies cooperate, the shoe they produce together can make them the same amount of profit.
For example, if each person purchases a pair of shoes, companies will earn $ 1 million. Each
But if the companies do not cooperate they will not have the earnings because they can
not produce shoes. In other words, the decision to cooperate or not cooperate determines the
M.I.T. Press
The extensive form is more extensive than the strategic form in game theory. Kim (2014)
states that, in strategic games, players will make simultaneous decisions, but in extensive games
the decisions of the players are given over time. And the conclusions of the decision lead to other
Unlike the strategic form, the order of decisions making and taking actions is important
in the extensive form. At the same time, the information that the players have at these stages and
Assume that two competing companies are players in a extensive form. The decisions of
these companies will affect one-on-one. If the first company decides on a certain issue and
makes a profit, the second company will make a decision based on the result of the decision of
the first company. If the first company makes too much profit as a result of the decision, the
competitor may decide to produce a better quality but cheaper product to protect its place in the
market. On the other hand, the first company may offer to cooperate. If the rival company does
not will to make a business alliance, then their decisions will determine their market gains.
M.I.T. Press
In game theory, all players make rational decisions. Thus, the players make new
decisions by analyzing the results of one's decisions and the decisions they make. Or it is
possible to have two strategies, A and B for each player. Compared to the combinations of other
players' strategies, the result of this player's strategy A may be better than the result of strategy
B. Then strategy A is said to dominate strategy B. A next game example shows how the
Suppose a web devoloper needs to buy a service from an internet service provider to
build a website. Suppose the Internet service provider is the first player and the devoloper is the
second player. The Internet provider offers two different quality services, high and low. High
quality service is more expensive than low quality service. But in fact, the quality of the high
quality service is not as high as expected. But since the customer does not know it, there are two
Although the customer prefers to buy high quality service, the provider prefers to sell low
quality service because it attracts more customers. Therefore, the low quality service strategy Is
dominant strategy for the provider. Also the customer chooses to buy low quality service because
CONCLUSION
In this report, I tried to explain what game theory is and the impact of game theory in
information systems. I have shown that how is important game theory in business field of
operations research and how companies set their own strategies and why it is important.
I emphasized that game theory have two important game forms in business field: normal
and extensive forms. Normal form games uses for normal and simple games and that game form
are generally used for simultaneous games and allows to analyze the results of decisions made at
Then I explained what are the differences between normal form and extensive form and
showed that in extensive game forms the decisions of the players are given over time and the
At the end I showed that companies strategies how important and what are the effects of
REFERENCES
Kagel., Roth. (Eds.). Handbook of Experimental Economics. New Jersey: Princeton Univ.
Press.
Game theory. Retrieved May 08, 2017 from World Wide Web
https://en.wikipedia.org/wiki/Game_theory
Theory", in Economic Analysis of Markets and Games, Essays in Honor of Frank Hahn.
M.I.T. Press
Science Reference