Game theory
Also called: prisoner's dilemma
Game theory is the study of strategic decisions, where each player's best choice depends on what the others do. The prisoner's dilemma is its most famous example.
In the prisoner's dilemma two players would both do better by cooperating, but each does better for themselves by defecting, so both defect. It explains price wars, arms races and why cartels break down.
Related terms
- Nash equilibrium: A Nash equilibrium is a set of strategies in which no player can do better by changing their own strategy while the others keep theirs.
- Oligopoly: An oligopoly is a market dominated by a few large firms, each of which must consider how the others will react.
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