Game theory is used to understand competitive situations. These are normally those scenarios in which the chances of a certain outcome largely depend on parties involved and also on a bit of chance. Consequently, the theory focuses on predicting what these respective players will do and hence the most appropriate alternative is chosen by the analyst. There is a particular mathematician who was responsible for this theory and was known as John Von Neumann. (Miller, 2003) Through his work in the mid twentieth century, the expert was able to spearhead several divisions in this interesting theory. Some of the divisions include
In the 2-person versus n-person division, the 2-Person approach largely focuses on the choices available to two players and how to bring out optimum outcomes. On the other hand, in the n - person division, great attention is given to the occurrences and coalitions that are likely to come out of prevailing circumstances. Then again the cooperative division of the game theory largely dwells on choices that are available to parties who have been bound by certain agreements. In uncooperative game theory, parties may find themselves obliged to one another because of the negative outcomes that may emanate out of their choices. Lastly, in the Zero sum scenario, players are likely to loose everything when the other party gains something. On the other hand, in the non zero sum, a player can gain something and still room for his or her opponent to gain it too.
Despite all these branches, there are certain common characteristics that make the game theory what it is today. These can be summarized under the following three criterions
Extensive or game tree form
Normal or strategic matrix
All forms of the game theory usually indicate the sequences or patterns of choices available to players and their chances of occurrences. The latter part largely depends upon a device and is usually backed up by some pay offs that are likely to occur after the end of a pattern of choices. The second aspect that makes the game theory what it is the normal, strategic or pay-off matrix. In this kind of approach, one is supposed to look though a series of avenues available to other players in the competition or event. Intersections of these avenues reflect the payoffs granted to a particular player doing the analysis. Additionally, the characteristic function is that possible coalitions that a particular player can ensure for another player regardless of what others end up doing in the process. (Osborne, 2004)
Criticisms of the game theory in understanding economic factors or strategic behaviour of firms
The most important thing to note in the game theory is the fact that players involved within a certain scenario are rational. It is also assumed that these players have well defined gaols that have been ranked from most important to least important. Besides these, the game theory is founded upon the fact that all decisions that are being made by certain individuals can be attached to a particular value and that players always tend