This topic examines the nature of game theory, why it is relevant for managerial decision making, and how it determines decisions. The starting point is an explanation of the nature of game theory in terms of the inter-dependence of decision making, and its wide range of applications in real life. Different types of game and their elements are described. The prisoner’s dilemma illustrates some of the counterintuitive aspects of game theory. Static and dynamic games are analysed, and the different types of equilibrium: dominant strategy equilibrium, iterated dominant strategy equilibrium, Nash equilibrium, subgame perfect Nash equilibrium and mixed strategy equilibrium. Cournot, Bertrand and Stackelberg types of oligopoly and their strategy implications are analysed, and comparisons are drawn between them and with perfect competition and monopoly. Games with uncertain outcomes and repeated games are discussed, along with commitment strategies and credibility. Limitations of standard game theory are discussed, such as the existence of bounded rationality and social preferences. Aspects of behavioural game theory are introduced to account for these factors.

This chapter introduces the basic models used to study imperfect competition: Bertrand, Cournot, Stackleberg, and Hotelling. Applications of these models are also described. Integrated into the exposition is an introduction to game theory and the concept of Nash equilibrium.