A player 's utility is optimized through use of a mixed strategy, in which one pick out of several possible actions. When people make decision, they tend to look for the best and the worst decision along with outcome. The expected payoffs determines what a good or worst decision a player could possibly make. The player would choose to maximize his payoffs by choose the highest probability of best outcomes among the choices, meanwhile minimize the probability of worst outcomes. Such probability includes risk of danger that are taken into consideration and …show more content…
According to application of game theory, many business interactions use game theory methodology. A popular example would be the price-setting of oligopolies which is similar to the Prisoner 's Dilemma. Let’s assume an oligopoly situation exists, if the companies choose to cooperate with each other then they are able to set prices. If they cooperate, both are able to set higher prices and leads to higher profits. However, if one company decides to defect by lowering its price, it will get higher sales, and resulting in gaining bigger profits than its competitor(s), who will receive lower profits. If both companies decide to defect, i.e. lower prices, a price war will ensue (proceed), in which case neither company will profit, because it will only retain its market share and gaining lower revenues at the same time. Business world is complicated and complex, such common and ideal situation like the oligopoly may not always be the case, therefore we should further explain in depth why game theory are applied into business. For example, when companies implement major strategies, there is always uncertainty about how competitors and potential new market entrants will react. We have to develop appropriate approaches based on game theory to help clients better predict and shape these