ABSTRACT
Game theory provides tools to model strategic interaction among economic agents. Strategic interaction refers to situations where outcomes depend on the choices of all agents. For instance, if Delta Airlines decides to cut its fares from Atlanta to New York with the hope of attracting customers and raising some quick cash, how much money it can raise depends on whether other airlines flying on the same route match Delta’s new price or not, because their pricing decisions will influence the number of passengers who choose Delta. Game theory has become a vast field in its own right. The aim of this chapter is very modest: to present, without formal definitions, just enough game theory in order to model how firms behave under oligopoly. A game consists of three basic elements: the players, their strategies, and the payoffs each player receives as a result of their combined choice of strategies.
