ABSTRACT
This chapter introduces the tools of game theory to analyze strategic interaction among economic agents. We begin with simultaneous-move games and concepts like dominant strategies, Nash equilibrium, and the Prisoner’s Dilemma, applying them to business contexts such as advertising competition. We then explore repeated games and collusion, using grim-trigger strategies and discount factors to show when cooperation is sustainable over time. Applications include cartels, international agreements, and platform enforcement mechanisms. Next, we study sequential games and strategic commitment, introducing subgame-perfect equilibrium and backward induction. Examples such as entry deterrence, price wars, and “chicken” games illustrate how commitment can influence outcomes. We also discuss hold-up problems in incomplete contracts and relation-specific investments, with implications for vertical integration and contract design. The chapter highlights both the power and limits of formal models in capturing real-world strategic behavior.
