Optimal Strategy = A strategy that maximizes a player’s expected payoff.
Strategy = A rule or plan of action for playing a game.Īn optimal strategy is one that provides the best payoff for a player in a game. Payoff = The value associated with a possible outcome of a game. Game = A situation in which firms make strategic decisions that take into account each other’s’ actions and responses.Ī payoff is the outcome of a game that depends of the selected strategies of the players.
The key to understanding strategic decision making is to understand your opponent’s point of view, and to deduce his or her likely responses to your actions. Game theory is the study of strategic interactions between players. Game Theory = A framework to study strategic interactions between players, firms, or nations. Game theory was introduced in the previous chapter to better understand oligopoly.
