Game Theory

Abstract

Game theory provides a powerful mathematical framework for modeling and analyzing systems with multiple decision makers, referred to as players, with possibly conflicting objectives. A game studied in game theory consists of a set of players, a set of strategies (or moves) available to the players, and their payoffs (or utilities) for each combination of their strategies. Depending on whether the players can sign enforceable binding agreements, game theory consists of two branches: noncooperative game theory and cooperative game theory. Noncooperative game theory provides concepts and tools to study the behaviors of the players when they make their decisions independently. Cooperative game theory, on the other hand, assumes that it is possible for the players to sign enforceable binding agreements and provides concepts describing basic principles these binding agreements should follow. Both noncooperative game theory and cooperative game theory have been widely used in many disciplines, such as economics, political science, social science, as well as biology and computer science, among others. They have also received considerable attention in supply chain management literature in recent years. In this chapter, we provide a concise introduction to some of the key concepts and results that are most relevant in our context. We refer to Osborne (2003) and Myerson (1997) for both noncooperative game theory and cooperative game theory, Fudenberg and Tirole (1991) and Başar and Olsder (1999) for noncooperative game theory, Vives (2000) on oligopoly pricing from the perspective of noncooperative game theory, and Peleg and Sudhölter (2007) for cooperative game theory, respectively.