John Nash. A name nearly everyone would have heard. But what exactly did he do? Possibly, many people know that he came up with a concept of equilibrium known as the “Nash Equilibrium”.
What is a game?
A game basically consists of the following things –
- Players — Duh! If you have a game you ought to have players, right?
- Actions — Again, obvious. Every player has a bunch of things (s)he can do.
- Payoffs — What would they play for if there is no money to be made? So, we specify how much does each player get, given all the actions chosen by players.
Nearly every interaction around us can be modeled as a game, at least every interaction of interest. Think about two firms competing in a market, an auction. Game theory is about formulating various strategic interactions between individuals in a systematic form through the three things I have mentioned and then thinking about the possible outcomes. Economics, by and large, is of interest to people and policymakers only if it has some explanatory power. Once we model interactions of interest as a ‘game’ then we proceed to predict as to what might happen.