What are Game Theory and Bargaining Theory?

Question: What are Game Theory and Bargaining Theory?

Answer: Here are a few definitions that should help you answer the question "What are Game Theory and Bargaining Theory?":

The best definition of Game Theory I've seen is contained in the Economists "Dictionary of Economics". In part it states:

Much of economic theory is concerned with the process and conditions under which individuals or firms maximize their own benefits or minimize their own costs in markets in which their individual actions do not materially influence others (perfect competition). There are, however, many cases in which economic decisions are made in situations of conflict, where one party's actions induces a reaction from others. An example is wage bargaining between employers and unions. A more simple case is the of duopoly, in which the price set by one seller will be based on his view of that set by the other in reply. The mathematical theory of games has been applied to economics to help elucidate problems of this kind.

The free online Encyclopedia Wikipedia begins their definition of Game Theory with the following explanation:

Game theory is a mathematical model used to study problems in economics, and, to a lesser but still significant extent, political science and psychology as well. It is used to study interactions with formalized incentive structures ("games"). The predicted and actual behavior of individuals in these games are studied, as well as optimal strategies. Seemingly different types of interactions can be characterized as having similar incentive structures, thus all being examples of one particular game.

A group of academic game theorists called the Game Theory Society defines game theory as:

Game theory studies strategic interaction in competitive and cooperative environments. Only fifty years old, it has already revolutionized economics, and is spreading rapidly to a wide variety of fields. It develops general mathematical formulas and algorithms to identify optimal strategies and to predict the outcome of interactions.

Bargaining Theory deals with a more narrow class of problems than Game Theory, but many economists tend to use the terms interchangably. Both bargaining theory and game theory can be broken into various subfields, most notably evolutionary game theory. The Economics Glossary gives the following definition for Evolutionary Game Theory: "Evolutionary game theory describes game models in which players choose their strategies through a trial-and-error process in which they learn over time that some strategies work better than others."

The Economics site at About.com keeps a list of resources on game theory called simply "Game Theory Resources".

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