Game theory describes the moves and countermoves between two parties who try to optimize their own result. A good example are price wars. In price wars, competing firms undercut each other’s prices, often to the point where none of them makes any profit and some go bankrupt. A better understanding of Game Theory helps decisions makers to strategize better than their competitors.
- Managerial Economics is not just one theory,…but rather a collection of several theories…that are applied into managerial settings.…In this video, we will learn about game theory.…Game theory describes the moves and countermoves…between two parties who try to optimize their own results.…This can be two competing firms,…two candidates running for office,…an employee and an employer…or even a married couple.…Married couple examples are sometimes the best,…but it would stretch the purpose of this video.…
A good example in business is price wars.…In price wars, competing firms undercut each other prices…often to the point where none of them makes any profit…and some go bankrupt.…Game theory describes every game in a formal language.…We need to identify the players, their actions…and the result of their actions.…The best tool to do so is a Pay-Out Matrix.…The set-up is a small remote town in the Midwest…with two dry cleaners.…Both are doing somewhat okay,…but both would like to generate more revenues…to invest in new machinery.…
- What are customers buying? (demand theory)
- What should we produce? (production theory)
- Which costs do I need to worry about now? (cost theory)
- What market am I in? (competition theory)
- What should we charge for it? (pricing theory)
To understand what managerial economics looks like in practice, Stefan explains how Google's auction-based advertising system employs the principles of game theory and how understanding this can help decision makers to outmaneuver their competitors.
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- Using economics to solve business problems
- Understanding price elasticity
- Demand curve shifts
- Economics of scale vs. scope
- Break-even and what-if analysis
- Profit maximization
- Economics in action