Game Theory is one of the most interesting area in Economics. In today's world, almost all of us are faced with situations in which we have to make strategic decisions for our benefit while taking into consideration what others are likely to do. The theory of games can be extended from Individuals to Groups, Firm & Organizations, and from organizations to full scale Economies. The Members of the OPEC for example are always tangled up in a cooperative game. The Output Decision of each member greatly affects the overall output price and quantity, so if all members cooperate to limit the supply, they all benefit. If any one major member tries to undercut its price, the rest of the members may be at a loss.

Learn more about Cooperative Games

Prisoner's Dilemma

A very common game that is taught to beginners of Game Theory is the Prisoner's Dilemma. Here two players are being interrogated in isolation.

If both prisoners remain silent, they both get locked for 1 year each. However, if both confess, then they both go to jail for 5 years. If one confesses and the other not, then the confessor is released immediately and the other punished for 20 years

"Simultaneous" and "Sequential" Moves

The two possible lines of action in any game could be:

The outcome of the game greatly depends upon which line of action has been adopted. For example, in the Prisoner's Dilemma, if both prisoners were sitting together and the prisoner 1 had to speak first follwed by prisoner 2 where he would have been aware of prisoner 1's move, the outcome might have been very different.

By Perfect Information we imply that each player is aware of the other players move. Thus, Simultaneous Games cannot be Perfect Information Games.