Question

1. (5 points) Can the game theory approach described in chapter 10 be used to analyze the model of Perfect Competition? Please explain.

game theory approach: In game theory, a decision rule that describes the actions a player will take at each decision point.

Answer 1

GAME THEORY AND ITS APPLICATION IN PERFECT COMPETITION

Game theory is a methodology that is used to analyse situations where two or more parties are expected to make interdependent decisions.
Perfect competition is a market situation in which there exist lrge number of buyers and sellers with homogenous product and uniform price. It is a useful technique when dealing with parties in the same situation having conflicting objectives. Therefore the game theory may be applied to analyze and understand the bargaining process.
The essence of game theory include:
A strategy; refers to a course of action each participant takes.
Players; the participants in the game who have to make strategic decisions
Payoffs; outcomes and rewards received by the players
Information set; means the available information to the participants.
Equilibrium; the point at which the players have chosen their strategies and received payoffs.
Game theory can be applied to different types of situations such as, legal, economic behavior, political and social relationships. A classic example that applies the concept is the prisoner's dilemma. Game theory is a theoretical framework to analyse social situations among competing players and producer in a strategic setting.
It is interest to analyze whether game-theoretic concepts can be used in situations of perfect competition, that is, cases with a very large number of players. The characteristic function is defined much as for finite-player games. It has been shown in particular that, for such games, the Shapley value and the core frequently coincide with free-market equilibria. It can be applied. Thus game theory is a part of oligopoly(imperfect market) can be used to analyse limited cases in perfect competition. In perfect competition market, uniform price and complete information about the markets prohibits the role of interdependence in majority cases.