Game Theory Does Explains Market

¶ … Game Theory does explains Market Structures

In economics, market structures are also known as market forms. They describe the state of a market with respect to the intensity or level of competition among buyers, sellers and the producers. The main procedure for clear differentiation between different market structures are based on the number of consumers and producers, the flow of information in the market and also the good and services provided

The major types of market structures are;

Perfect competition,

In this type market structure there are large number of firms producing homogenous products i.e. goods which are similar in nature hence there is critical and cut throat competition among the players in the same market topography or same product category. (Geoff R., 2006).

Monopolistic competition,

They are also called competitive market structures, where there are a many independent firms with a small proportion of the market share that they rule and can determine the direction of the market with a single decision they make.

1. Oligopoly

In this form of market structure the market is densely intense with small number of firms which own not more than 50% of the total market shares. It is characterized by many sellers and few buyers leading to intense competition among the market players since the huge amount of supplies calls for a vigorous marketing strategy.

2. Monopoly

In this form of market structure there is only one firm which provides goods and services of a particular kind. If it is not the only player in the market then there are other smaller players who are easily subdued and become hardly noticeable. The monopoly structure is characterized by inefficiency of goods and services offered to the market due to lack of market competition.

The game theory

The game theory tends to explain how people interact in different forms of market structures. There are two main types of game theory ie. cooperative and non-cooperative theories (David K.L.,

Non-cooperative game theory deals with how intelligent persons interact with one another with an aim of achieving their own interests and cooperative game theory where the firms maximize the market utility through obtaining the most from the monopoly outcome (Theodore L.T. & Bernhard S., (2001).

The game theory market structures tend to explain various types of market structures. Under oligopoly market structure the game theory has three assumptions:

a) Individualism: It is also known as laissez-faire where an individual is free to pursue his or her own interest in the economic system. This is an action which is led by an individual, all the duties originate from one person, and these people always believe in self independence.

b) Rationality: is based on rationality of the consumers where the consumers have rational preferences, they choose an item over the other based on the rational preference. The individuals will consider one persons' idea in the market then consider multi-person's opinions against his before making a conclusion.

c) Mutual Interdependence: This assumption is based on the relationship between two or more individuals where one person depends upon the other for economic interest or benefit. When making a decision one has to consider the effect of his or her decision to the partner. This is common in the Perfect competition -- pure market phenomenon.

With the assumptions above the game theory helps in developing a perfect competition among the consumers.

Goal theory in perfect competition market

It tends to describe market structure based on assumptions which are non-existent, most market systems are imperfect, however the long run and short run situations can help in holding the assumption to be true based on the equilibrium, price and output.

Basic assumptions required for conditions of pure competition to exist as below;

Many small firms: Each producer producing a significant percentage in the total output in the market hence has no ruling in the market prices.

Many individual buyers, there exists no monopoly power: Perfect freedom of entry and exit by the firms with the application of the game theory it ensures that all firms attain maximum required profits in the long run.

Homogeneous products: these are similar product in the market and with the application of the game theory there can be coming up of perfect substitute products hence one firm winning advantage over the other.

Monopolistic market structure: In the game theory an individual participates directly in a market system in management of the firm and the decisions of the firm on price determination and production hence the advantage of the other. In order to maximize profit the game theory allows for arrangement of different prices to the buyers but through various activities like advertisements branding and personal selling which enables the organization to win advantage over the other.