Chapter 5 Noncooperative game theory for industrial organization: An introduction and overview

Noncooperative game theory is a way of modelling and analyzing situations in which each player's optimal decisions depend on his beliefs or expectations about the play of his opponents. Game-theoretic methodology has caused deep and wide-reaching changes in the way that practitioners think about key issues in oligopoly theory, much as the idea of rational expectations has revolutionized the study of macroeconomics. This chapter reviews those aspects of the noncooperative game theory that are most commonly used by industrial organization economists and describes the most important applications of the theory. There are two equivalent ways of formulating a game. The first is the extensive form. An extensive form specifies (1) the order of play, (2) the choices available to a player whenever it is his turn to move, (3) the information a player have at each of these turns, (4) the payoffs to each player as a function of the moves selected, and (5) the probability distributions for moves by Nature.