Game Theory and Perfectly Competitive Market

GAME THEORY AND PERFECTLY COMPETITIVE MARKET 3

GameTheory and Perfectly Competitive Market

GameTheory and Perfectly Competitive Market

Itis not valid to apply game theory to the analysis of organizationalstrategy in a perfectly competitive market. This is because the gametheory and the perfectly competitive market have different aspects ofdecision making. On one hand, the game theory explores howindividuals make in relation to the interaction with other players ina market (Dufwenberg,2011).On the other hand, a perfectly competitive market has a solecharacteristic of the insignificance of the individual decisions by aplayer in the market. In perfect competition, the decision by oneplayer does not cause any changes in the market.

Theinvalidity of the application of game theory in a perfectlycompetitive market is observable in the price mechanism. In aperfectly competitive market, the price is not influenced thedecision of a single player. Instead, the price is wholly determinedby the forces of demand and supply (Nelson,2013).This does not resonate with the principles of the game theory that adecision of one player affects the results of the other. The gametheory can therefore not apply because the players in a perfectlycompetitive market are price takers and not price determinants.

Inaddition, the game theory cannot apply because of the insignificanceof the players’ entry or exit in a perfectly competitive market. Inperfect competition, entry or exit of an individual player cannotinfluence either the market or change the results of other players inthe market (Becker,2015).Therefore, it is invalid to apply game theory that argues for theresults of an individual player being determined by the decisions ofother players.

References

Dufwenberg,M. (2011). Game theory.WileyInterdisciplinary Reviews,2:&nbsp2, 167–173

Becker,G. (2015). Perfect Competition. WileyManagerial Economics.Vol 8:1, 14–29

Nelson,R. (2013). Demand, supply, and their interaction on markets, as seenfrom the perspective of evolutionary economic theory. Journalof Evolutionary Economics,January 2013, Volume 23, Issue 1, pp 17-38