What Is a Real Life Example of Game Theory?


Martha Robinson

Game theory is a highly fascinating field of study that has numerous real-life applications. The concept of game theory involves analyzing and predicting the behavior of individuals or groups in strategic situations where the outcome of one’s decision depends on the decisions made by others.

One real-life example of game theory can be observed in the pricing strategies employed by businesses. Consider two competing companies, A and B, that both sell similar products.

If company A lowers its prices, it may attract more customers and earn higher profits. However, if company B also reduces its prices, both companies may end up with lower profits due to increased competition.

This scenario is an example of a classic game theory problem known as the prisoner’s dilemma. In this situation, both companies have to decide whether to cooperate (i.e., keep their prices high) or defect (i., lower their prices).

If both companies cooperate, they will both earn higher profits. However, if one company defects while the other cooperates, the defector will earn even higher profits while the other suffers losses.

To better understand this concept, let us break down each player’s options using bullet points:

  • Company A: Cooperate (keep prices high) or Defect (lower prices)
  • Company B: Cooperate (keep prices high) or Defect (lower prices)

If we put these options into a matrix format, we get:

Cooperate Defect
Cooperate (3,3) (0,5)
Defect (5,0) (1,1)

In this matrix, the numbers in parentheses represent the payoffs for each player. For instance, if both companies cooperate (keep prices high), they will both earn a payoff of 3. On the other hand, if one company defects and lowers its prices while the other cooperates, the defector will earn a higher payoff of 5 while the other suffers a loss of 0.

From this matrix, we can see that both companies have an incentive to defect and lower their prices. However, if they both do so, they will end up with lower profits than if they had both cooperated.

To break out of this dilemma, both companies may need to rely on strategies such as communication and trust-building to cooperate and achieve mutually beneficial outcomes.

In conclusion, game theory is a powerful tool that can help us understand complex strategic situations in various fields such as economics, politics, and psychology. The example of pricing strategies employed by businesses is just one real-life application of game theory that highlights the importance of cooperation and trust-building in achieving optimal outcomes.