Game theory and strategic behavior

Nash equilibrium is defined as a set of strategies that none of the players can improve their payoff, given the strategies of the other participants. Since there can be more than one equilibrium case, the actual outcome of the game depends on which action occurs first. For games in which the participants keep shifting from one strategy to another, it is highly unlikely to have Nash equilibrium. The underlying meaning behind none of the players can improve their payoff, given the strategies of the other participants means there is no incentive or a relatively lesser incentive to improve one’s payoff, given the other’s strategy.

Dominant strategy: when the optimal strategy for each firm depends on the strategy selected by the other firm. But

when one of the firm’s strategy does not depend on the choice made by the other’s, it is a dominant strategy.

When one player has a dominant strategy, the game will always have a Nash Equilibrium as the player will always use the same and the opponent with reply with his best possible strategy.

Hence, when analyzing a game (entering new markets, profit maximizations, loss minimization…) the first step is to analyze whether a participant has a dominant strategy. If such a strategy exists, then the outcome of the game should be easily determined as the player will use the dominant strategy and other participants will use their best response. If there is no dominant strategy, the next step is to search for other Nash equilibriums. If there are none, it may be advisable to use advanced game theory.

Thus far, the analysis of market structures has assumed that managerial decisions focus on maximizing profits.

However, in highly competitive situations, typically in oligopolistic markets, players may adopt a risk averse strategy of assuming the worst possible outcome is as beneficial as possible, i.e. to maximize the minimum possible profits particularly works in NPD.

Loss avoidance rather then profit maximization being the objective, the maximum may not be in line with Nash equilibrium.

In all the above models, more often than not, be it a Nash equilibrium or otherwise, there is always a possibility of cooperation, cooption. However, in non cooperative games, i.e. it is not possible to negotiate with other participants and enter into a kind of agreement; like the one in the prisoner’s dilemma, a Minimax strategy.