Game Theory and Its Application

Game theory is a concept that entails formal study of cooperation, conflict and actions taken up by several interdependent agents. Game theory as a concept lays down the structure that facilitates through analysis an understanding of the strategic choices agents adopt[footnoteRef:1]. The earliest conceptualization of game theory is by Cournot in 1838 where the analysis sought to clarify choices and actions taken in a duopolistic market [footnoteRef:2]. Over the years, exploration of the game theory incorporates market equilibrium entailing economic social and political decisions. As a decision making tool, game theory involves the application of mathematical concepts to analyze strategic choices and problems. The decision making process allows enumeration of the players strategic options considering preferences and responses[footnoteRef:3]. [1: Gibbons, and Robert. Game Theory for Applied Economists. Princeton, NJ.: Princeton University Press, 1992. Gibbons, and Robert. Game Theory for Applied Economists. Princeton, NJ.: Princeton University Press, 1992.] [2: Rasmusen, and Eric. Games and Information: An Introduction to Game Theory, 3rd Ed. . Oxford: Blackwell, 2001] [3: Ibid 1]

Application of Game Theory in Auctions

The most common type of auction is the ascending bid open auction. This is where an object is put up for sale with potential buyers declaring willingness until there is only one bidder left. This presents a simple game decision strategy. There is a complicated decision strategy in auctions where willing buyers submit bids for an item privately. Once all bids are received, the auctioneer awards the product to the high bidder at the second highest price. In this situation, the optimal decision strategy for the bidders is to provide their actual value for the item as their bid. This strategy is the weak dominant strategy since it is the one likely to yield optimal gain to the players whether or not the win the bid.

The optimal option for the bidders in the second price auction is to give one's own value for the item. This is so since if one bid lower than their worth for their item and win the action they will pay the second highest bid. In this case, they have optimal outcome although there is a probability that the item will go to someone else at a price lower than their valuation. Alternatively, if one was to bid a higher price than their own valuation, should they manage to win the bid they will end up paying a price they less prefer to having the object.

This understanding being a conceptualization among all players enforces the weak dominant strategy of one's own valuation as the preferred choice. The preferred choice, though considered the weak strategy in the second price auction yield Nash equilibrium[footnoteRef:4]. This is a situation where the players cannot improve their utility by choosing any other available option. The open ascending bid and the second price auction avail an opportunity to analyze possible play option by the interdependent players. Recent uses of game theory in the auction for items deploys the two types of auctions where participants can easily receive updates on the bids made and they can place their alternate bids for an item. The auctioneer sets the minimum price for a commodity thereby setting the lower limit for their item. The bidders are invited to place their price for the commodity. [4: Gibbons, and Robert. Game Theory for Applied Economists. Princeton, NJ.: Princeton University Press, 1992. Gibbons, and Robert. Game Theory for Applied Economists. Princeton, NJ.: Princeton University Press, 1992.]