After starting to read through some of our resources, we discovered that the functionality of players' gains and losses are shown with what's called a "payoff matrix". There are the "players", the choices they might make, and the possible outcomes when both players make a decision. Let's examine this simple diagram:
As you can see there are 2 possible decisions Firm A and Firm B will make. In each quadrant, the set of numbers describes the "payoff" of making these decisions. For every set of numbers, the first number in the set represents the payoff for Firm A's decision and the second number is the payoff for Firm B's decision. Keep in mind that the decisions made are interdependent, so what one player does will directly affect the other in either a positive or negative way.
Take for instance when Firm A and Firm B both decide to start a new campaign. This is represented by the set 10,5 meaning that if Firm A starts a new campaign, their payoff is "10", and since Firm B is also starting a new campaign, their payoff is "5". Now compare that to if neither firm decides to start a campaign (lower right quadrant). The set is now 10,2 which means that Firm A's payoff will still be 10 and Firm B's gain will only be "2". Knowing this information, Firm B should decide to start a new campaign, for at least they will gain from it.
Take for instance when Firm A and Firm B both decide to start a new campaign. This is represented by the set 10,5 meaning that if Firm A starts a new campaign, their payoff is "10", and since Firm B is also starting a new campaign, their payoff is "5". Now compare that to if neither firm decides to start a campaign (lower right quadrant). The set is now 10,2 which means that Firm A's payoff will still be 10 and Firm B's gain will only be "2". Knowing this information, Firm B should decide to start a new campaign, for at least they will gain from it.
Does it get more complicated? It certainly does, but we hope to increase our understanding of game theory when we attend the lecture of a guest speaker at our college.
(Book Find: Thinking Strategically by A. Dixit and B. Nalebuff (Norton, 1991) --> An introductory explanation of Game theory is a suggested read which I found from Game Theory: An Introductory Sketch (will open in a new window).
(Book Find: Thinking Strategically by A. Dixit and B. Nalebuff (Norton, 1991) --> An introductory explanation of Game theory is a suggested read which I found from Game Theory: An Introductory Sketch (will open in a new window).
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