Blackwell Reference Online

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Game theory is a powerful mathematical tool for modeling conflict and cooperation that originated with von Neumann and Morgenstern's (1944) seminal work. A game consists of two or more players , each with a set of strategies and a utility function that assigns an individual payoff to each combination of strategies, such that payoffs for a given strategy depend in part on the strategies of other players. This strategic interdependence can be represented in several ways: as a payoff matrix (the “normal form,” where players act simultaneously), a decision tree (the “extensive form” for sequential moves), or as a production function (for n -person games). Strategic interdependence allows two types of games. In zero-sum games , a gain for one player is always a loss for the other, which precludes the possibility of cooperation for mutual gain. In positive-sum games, everyone can gain through Pareto efficient cooperation, where some are better off and none are worse off, compared to other outcomes. If cooperation is Pareto efficient and both players are rational, why would cooperation ever fail? There are two reasons: the fear of being “suckered” by the partner and the temptation to cheat. These failures can be avoided through enforceable contracts that preclude “cheating” (“cooperative games”) or through collusion (in “non-cooperative games”). In cooperative games, non-cooperation ... log in or subscribe to read full text