The modeling of strategic interaction between two or more players in a situation that has certain rules and outcome is referred to a Game Theory. This theory assumes that the players are rational and will always want to maximize their payoffs. The sequential game is the simplest form of this game which involves two players. The first player makes the first decision while player number two’s decision is based on the first player’s decision. The basic assumption of this theory is at of maximization and rationality. Player number two will, therefore, try to maximize his or her payoff in any given circumstance. This is because he or she has more options than player number one. The second player has a total of four options to choose from. Decisions can be narrowed down by eliminating the options that player number two will not choose. This will result in an equilibrium which can be found by backward induction. By following the equilibrium path it is easy to find out the choices that would be made by player number 1 and player number 2.
For instance, such a game can also be used by taking companies as players. The game can make use of product release scenarios. If, for example, company number 1 plans to release a product, there is a possibility that the company number 2 will respond to such a venture. Company number 2 can choose to release a similar but competing product in the market (Kaltura). We can, therefore, forecast sales of the newly introduced product in different ways. It is possible to set up a game that will predict the progression of events.
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Game theory is a good tool for solving real world outcomes which are sometimes complex and confusing. It can also be used as an instrument for financial analysis. This means that game theory has a number of uses in the business world ranging from product releases, mergers, and other corporate activities which could otherwise have caused major challenges in any real world situation.
References
Kaltura. (n.d.). Game Theory C: Nash, Dominant, and Sequential Games. Retrieved from:
https://cdnapisec.kaltura.com/index.php/extwidget/preview/partner_id/956951/uiconf_id/38285871/entry_id/1_x4lxfbpw/embed/dynamic
