What is game theory, dominant strategy, and strategic behavior?

Question

in relation to economics. not too complicated answers please. thanks

Answer 1

Above answer is accurate: Here is another way of putting it

game theory: A formal way/put on paper/computer to analyze psychological interaction/decisions  among an opponent/group who behave logically/strategically.

You can apply this theory say if you were in a takeover bid for a struggling company and you have a rival bidder. Your basing your choice on what to bid based on what you think the rival will bid. Lowball and your out, over bid and you've paid $millions too much.

or Like on the show surviver you want to vote out who you think most will so you do not offend others who will still have a vote that survive.

or at an auction, or If your cheating on your girlfriend w/ her friend and she knows something is up but not everything so she gets you and her friend in same house but separate rooms, but she wants you to admit what you did. If you lie and her friend confesses your out of both their lives, if you both lie and deny everything later you can get together and collaborate, if you both confess and say sorry you at least have her respect for telling the truth and remain friends eventually but lose her as a girlfriend.

In world economics game theory can be used to set the monetary of the value of your currency.  Fed interest rates low among other factors lower value of money. So if your value of currency is low obviously inflation sets in but you can ship out more goods to another country who has higher currency value creating a trade imbalance and help grow your economy. Or use of trade tariffs. This is what China has been doing to the US; however, recently we have declined our dollar purposely to ship out more goods to other nations to help our struggling economy. Sure it hurts individuals who buy food and gas but it really helps them because they stay employed.

There are various strategies and questions to ask for example

-Who are the opponents/players?

-What are the choice of strategies available to the players? (not always the same)

-When does each player make their choice and when do they apply it?

-How much do the players stand to gain/lose?

Strategic: Say a group of rental car agencies in a similar area set their prices of rentals/insurance/upgrades based on a strategic way to maximize profits. They base this on what the others will set their prices  in order to draw business and make most profits but not to eliminate the other competition as they play off eachother.

Dominant strategy: Say Wallmart moves into town next to an older supermarket, a nearby tireshop, and a pharmacy. They plan to wipeout all the competition in the area. In order for this to work the players have to know that their opponents are rational and will not play dominated strategies. They rely that the other businesses will act strategically but not dominant. So they come in, lower all prices below that of the competition by obviously buying in bulk thus lowering shipping and giving out lower wages to their employees to cut expenses. The other businesses cannot compete w/ this strategy and die out.

But if there were a Target built a year later across the street the dominant strategy would not work because Walmart knows that Target would be able to compete even w/ low prices so there is not a Dominant strategy because both are able to use it. Thus they go back to a more Strategic one. This example is just a macroeconomics example.

There are all type of charts you can print out to use mathematics to maximize your decision and as there are more players/choices and variables of what each has to gain, it can get very complicated as you start to introduce Algebra.

need more help let me know.

Answer 2

Game theory is the study of decision making when the outcome depends on what other people (or firms) do.

A dominant strategy is a choice that will make you the best off, no matter what everybody else does.  You can find it by going through the decisions that the others can make and seeing in each case which strategy makes you best off.  If it's the same strategy in all cases, then it's a dominant strategy.  Not all games have a dominant strategy.

Strategic behavior is making decisions in a way that maximizes your utility given the decisions of others.