Applying Game Theory in Economics Essays | tutor2u Economics
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Applying Game Theory in Economics Essays

  • Levels: AS, A Level
  • Exam boards: AQA, Edexcel, OCR, IB

When can game theory be used to good effect in A level economics essays?

You would normally use game theory at A2 level when discussing the market structure of oligopoly. But in fact there are many other instances where you might be able to apply game theory to topics contained within the A2 syllabus – this revision note tries to provide you with a few ideas!

Applying Game Theory in A Level Economics - revision video

Game theory concepts have become hugely important in economics and whilst there are limits to how far analysis can stretch, making use of some of the core ideas can add greatly to your evaluation and analysis marks in the summer papers.

Theory of the firm

Day to day pricing decisions taken by firms

  • Falling oil prices – if one airline decides to lower their fares as oil prices decline, will others follow?
  • Price wars between businesses battling for market share - for example pricing decisions by the makers of game consoles
  • Examples / allegations of tacit collusion between businesses e.g. price matching schemes - Sainsbury's announced in April 2016 that they were ending their price match promotion

Oligopoly

  • Uncertainty about each firm's objectives (profit max, market share, revenue etc)
  • Uncertainty about each firm's strategies (cooperative, competitive, follow the price leader)
  • Price leadership / price collusion (e.g. cartel behaviour)

Research and development projects

  • Patent battles, research and development races in the pharmaceutical industry – to bring new drugs to market and then protect the intellectual property rights
  • Patent wars in mobile telecommunications

Strategic alliances (cooperation) between businesses

  • Increasingly many multinational businesses are entering into joint ventures to grow their business and achieve market penetration and power in different markets and industries around the world.
  • Joint ventures reflect recognition of mutually beneficial collaboration – for example technological joint ventures are permitted by the EU and UK competition authorities because of the potential benefits from innovation and dynamic efficiency.
Game theory and Greece in 90 seconds

Environmental economics

  • The Prisoner's Dilemma can be applied to the tragedy of the commons – where people acting in a selfish manner leads to the long term destruction of a resource (e.g. over-fishing), whereas people acting in a common interest can help to protect and hopefully renew the resource – but it does require a commitment to collective, cooperative behaviour.

Positive sum game:

  • Games where cooperative behaviour can lead to all parties benefiting i.e. the net returns to cooperative behaviour are positive, although the gains may be unevenly distributed among the players.

Currency intervention

  • Currency speculators in foreign exchange markets are basically playing a game with central banks if they believe that there is the possibility of intervention in the market to affect the currency's value.

Labour market

  • Wage negotiations between workers/unions and their employers
  • Threats of industrial action and the credibility of those threats affect the behaviour of employers

Auctions

  • The rapid spread of auctions (including online auctions) as a means of allocating resources and setting market clearing prices – different types of bidding behaviour, different types of auction

Fiscal policy

  • Tax competition between nations competing for inflows of foreign direct investment – if one country cuts their corporation tax rates or introduces a system of flat-rate taxation, how might other nations respond?

European monetary union

  • Discussions between Greece and the troika (EU< IMF and ECB) over the terms and conditions of debt relief for the Greek economy

Revision video: Game Theory (A Level Economics Revision Update 2018)

Game Theory (A Level Economics Revision Update 2018) - revision video

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