Game theory - history, definition, and how to apply it

Read our guide to the definition of game theory, its history, and how to apply it in business.

Ron Pearson

Game theory has a wide range of possible applications - in its essence, it is the science of strategy. It is applied in a variety of fields, such as business, economics, psychology, gambling and even warfare. It’s about understanding how our strategies and actions are interdependent with the strategies and actions of other “players”.

This is Futrli's guide to game theory, its definition and its potential impact on your business. But what exactly is game theory? And how does it apply to you and your business? We’ll look at some of the fundamentals of game theory, how it can imrpove your company's strategic game and game theory applied to the business world.

Game theory
Game theory has a wide range of possible applications - in its essence, it is the science of strategy.

History and Definition

Game theory was develop by Princeton mathematician and economist John von Neumann and Oskar Morgenstern. Through mathematics and logics, the game theorists identified the interdependent actions that players take to achieve the best outcomes in different games. Game theory applies to a number of different games, whether its strategic interaction in business or a poker game. Such a game is concerned with the interdependence of player’s actions, and how they inflience other players’ decision-making. The intended outcomes of different players are examined and an optimal strategy can be determined.

Outcomes can be:

  • Mutually beneficial (positive sum)
  • Detrimental for all players (negative sum)
  • Beneficial for one player at the ultimate expense of others (zero sum)

More than one type of (modern) game theory

There are several types of game theory, but the two best known are cooperative and non-cooperative. When individuals pursue a common goal, cooperative game theory explains how cooperation and coalitions work. For example, it might investigate how a venture may benefit two non-competing firms while also dividing the benefits among participants. Non-cooperative game theory explores how competitors deal with one another in the pursuit of their own goals. For instance, how competing businesses might fight for the attention of consumers.

Woman next to whiteboard
There are several types of game theory, but the two best known are cooperative and non-cooperative.

How can I apply game theory to my business?

Hypothetical examples of game theory are widely know, such as the famous “prisoner’s dilemma”. Two individuals are held in separate cells and their sentences are influenced by the unseen and unknown behaviors of the other. But what is the use of game theory in business?

Game theory is used by economists to better analyze oligopolies, in which a shared market is controlled by numerous corporations but since the barriers to entry are extremely high, they generally don't have to worry about competitive threats. As a result, oligopolies are frequently a positive-sum game. Game theory can also be used for market research and competitive analysis. When researching the competitors your company might be looking at how their actions  influence the behaviours of consumers. This may lead to a shift in your strategy as you adopt your competition's methods and use them as your own to connect with their consumers.

Applying game theory to a business
Game theory is used by economists to better analyze oligopolies.

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