Game theory is the logical analysis of situations of conflict and cooperation.

It can also be defined as a theory of rational decision

in conflict situations. Model of such situations, as they are conceived in game theory, involve a set of decision makers, called
players, a set of strategies available to each player, courses of action which he or she may choose to follow, a set of outcomes,
the strategies chosen by each player determine the outcome of the game and a set of payoffs accorded to each player in each of
the possible outcomes Rappaport (1974) So, Game theory is the study of how players should rationally play games. Each player
would like the game to end in an outcome which gives him as large a payoff as possible. He has some control over the outcome,
since his choice of strategy will influence it. The essay to follow will give a detailed account on how vital game theory is used in
real life situation.

Game theory is widely used in political affairs as it is an effective tool in the hands of diplomats and politicians to analyze any
situation of conflict between individuals, companies, states, political parties. Rationality of actors and the choice of strategies are
one of the basic assumptions of game theory. Game theory seems to be a useful tool for research on political strategies because it
captures the interaction between two contesting political parties when their actions are interdependent and therefore cannot be
analyzed separately Sandler and Arce (2003). In the context of Zimbabwe, Prisoner’s dilemma, can be used in a situation where
two political parties choose between cooperating in a government of national unity or not to cooperate following an electoral
dispute.

Let there be two contesting parties ZANU PF and MDC. Both parties face common goal of reducing poverty through economic
development. This can be achieved through a set of two strategies that is cooperating or not to cooperate in a government of
national unity.

MDC
 cooperate Not
cooperate
Cooperate ( 40,40)% (24,12)%
ZANU PF
Not (12, 24)% (10,10)%
cooperate

We assumed that if both parties cooperate their chances of reducing poverty is 40% each and it will be an advantage to both
parties as they can achieve their goal at a highest level. If either ZANU PF or MDC cooperate it will eradicate poverty by 24%
there by having an advantage as compared to the one which does not cooperate which will reduce poverty at a relatively lower
level of 12%. However, if both parties do not agree to cooperate, no party will have an advantage and they will find themselves
in a worse off condition that is each party will be capable of reducing poverty by 10% thus their lowest level of development.

Game theory is an important tactics applied in mathematical economics and business for modeling the patterns of behavior of
interacting agents. According to P.A. Samuelson and W. D. Nordhaus: Economic life contains many situations with strategic
interaction among firms, households, governments or others. Game theory analyzes the way that two or more parties, who interact in
an arena such as a market, choose actions or strategies that jointly affect all participants Samuelson (2010). Game Theory is important
as it can be used as a tool to analyze economic competition. Interdependence is the essence of competition, consequently a firm’s
decision does not depend just on the firm’s own actions but also on what actions competitors are likely to make. With this obtaining,
Conflict of interest is inevitable therefore in situations where firms in an industry cannot collude explicitly as in the case of
oligopolies, industry players make use of the theory of games so to maximize their payoffs.
To illustrate this, non-cooperative game theory shall be used to predict the behavior of rational,
intelligent firms competing independently often reach their best decisions in oligopoly markets.
Taking for example two 2 major bakers in Zimbabwe, Bakers Inn and Lobels producing bread,
where Bakers Inn is the price leader and chooses between two sets of prices, one which is to
charge $20 for a loaf of bread or two which is to charge $30. Lobels, the supposed follower
observes the moves then will also have to choose between the two prices, $20 versus $30. Their
expected returns assuming a game of perfect recall are presented as follows.

STRATEGIC FORM REPRESENTATION 0F A PRING GAME

LOBELS STRATEGIES

$20 $30

BAKERS INN $20 $8K, $8K $13K, $4K

$30 $4K, $13K $10K,
$10K

The above table represents payoffs of the two competing entities where Bakers Inn is the row
firm and Lobels the column firm. It is clear that each firm prefers a higher payoff to a lower one.
From the configuration of the above table both firms are better off if they price at $30 rather
than at $20 however if Lobels thinks that Bakers Inn will price at $30 then it is better off if the
firm price at $20 therefore the pair of strategies ($30, $30) is not a sustainable strategy as it
provides an incentive for either firm to change its strategy unilaterally. This means the pair
represents a disequilibrium leading to both the firms finding themselves in the very position they
were in at the beginning. The pair of strategies ($20, $20) is an equilibrium because moving to
$30 with the other firm pricing at $20 will only hurt the mover. This situation represents the
Nash equilibrium which is an outcome that once achieved no player can increase payoff by
changing decisions unilaterally. The pair of strategies ($20, $20) can therefore be thought of as a
strict dominant competing strategy for both firms.

Game theory analysis is also important in real life situation as it can be used to generate a
better estimate of the value of auctioned commodities. Comparative bidding is an example
of games of incomplete information in the theory of games. The incompleteness of
information arises naturally from each bidder’s private information about the value of the
object under sale. The general idea is that the bidders estimated values are positively
correlated therefore for any bidder, knowing other bidder’s estimated value of the object
under sale would not only help in term of winning or losing but also to get a closer estimate
to the real value of the item under offer. Whenever a firm outwits other bidders for example
on Hammer and Tongues Auctioneers Zimbabwe’s machinery and equipment auctions and
liquidation auctions it must realize that it beats out a number of other bidders whose
estimated worth of the goods under auction were presumably lower than its own estimate.
Perhaps the winning firm’s estimate was highly optimistic therefore if the firm bid their
value estimate basing on their own private information they are likely to lose money in the
long run. The equilibrium strategy would be to bid lower than the estimated value of both
private information and the possibility of that information being highly optimistic.

The game theory analysis is also useful as it can be used in Economic phenomena such as
bargaining. Collective bargaining has always been a big deal where labour relations are
involved. There is a clear connection between collective bargaining and game theory.
Collective bargaining involves negotiations between employees and their employer in order
to achieve an outcome with the most mutually beneficial option. Considering a negotiation
between Zimbabwe’s Congress of Trade Unions (ZCTU) on behalf of civil servants and the
government of Zimbabwe as the employer, game theory could lead to both parties
examining the various options in terms of wages and benefits and end up with a contract
that maximizes the welfare of both side. It is key to not that both parties are worse off if
they decide to work independent from each other when in pursuance of their goals and the
parties are better off if they cooperate. The ideal contract that they could end up with can as
well be thought of as a Nash equilibrium because neither side would benefit from making a
change to a different strategy and works unilaterally.

Game theory is applied for determining different strategies in the business world. It offers
valuable tools for solving strategy problems. Many business strategies are short or long-
term plans to achieve sustainable profitability. A business can often successfully position in
the market with right strategy and a business will suffer in the long run with wrong
strategy. Strategic behavior occurs regularly among executives, manager and investors in
 business world. They must decide to enter into new markets, launch new products, invest
now or lose the opportunity to invest and make pricing and purchasing decisions. Game-
theoretic models are very potential tools for analyzing firm decisions. Game theory models
forces each player to consider the actions of others when picking their strategy, in which
one player may respond to the moves of his competitor. It provides significant benefit to a
decision maker Geckil and Anderson (2010).

Game theory is a useful and potential tool for the understanding of human affairs. It can
also be expounded as a part of a general theory of Rational Behavior. Rationality is a
normative concept, which indicates to what we should do in order to attain a given end or
objective. Rational behavior models are widely used in game theory. According to Von
Neumann and Morgenstern (1944): ‘We wish to find the mathematically complete
principles which define ‘rational behavior’ for the participants in a social economy, and to
derive from them the general characteristics of that behavior’. Game theory as a theory of
rationality advices what agents (players) should do in specific interactive situations, given
their preferences.

However, the biggest issue with game theory is that, like most other economic models it relays
on the assumption that people are rational actors that are self-interested and utility maximizing
as stated in the Traveler’s Dilemer in game theory. Of cause, consumers are social beings who
do cooperate and care about the warfare of others, often at their own expense. Game theory
cannot account for the fact that in some situation consumers may fall into a Nash equilibrium
and other times not, depending on the social context and who the players are. The theory
assumes that each firm has knowledge of strategies of the other as against its own strategies and
is able to construct the payoff matrix for a possible solution. This is highly unrealistic
assumption and it has little practicability. An entrepreneur is not fully aware of the strategies
available to him, much-less those available to his rival. He can only have a guess of his and his
rival’s strategy.

The theory assumes that both two players are prudent man. Each rival moves on this assumption
that his opponent will always make a wise move and then he adopts a counter move. This is an
unrealistic assumption because entrepreneur do not always act rationally but if not an
entrepreneur is not prudent he ca not play either the maximin or minimax strategy. Thus the
problem cannot be solved

Moreover, while it is easy to understand two person games, the analysis becomes complex and
difficult when elaborated to three or four person games. The theory of games has not been
developed for games with more than four plays. Most economic problems involve many players
for instance, the numbers of sellers and buyers are quite large in monopolistic competition thus
game theory does not provide any solution to it.

In conclusion, game theory is a powerful analytical tool which helps in understanding the
phenomena that can be observed when decision makers interact. Game theoretic models have
become increasingly sophisticated and in consequence, much more powerful and useful. It has
been successfully applied to a wide variety of disciplines in real life situations.