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Game Theory and Perfectly Competitive Market
It is not valid to apply game theory to the analysis of organizational strategy in a perfectly competitive market. This is because the game theory and the perfectly competitive market have different aspects of decision making. On one hand, the game theory explores how individuals make in relation to the interaction with other players in a market (Dufwenberg, 2011). On the other hand, a perfectly competitive market has a sole characteristic of the insignificance of the individual decisions by a player in the market. In perfect competition, the decision by one player does not cause any changes in the market.
The invalidity of the application of game theory in a perfectly competitive market is observable in the price mechanism. In a perfectly competitive market, the price is not influenced the decision of a single player. Instead, the price is wholly determined by the forces of demand and supply (Nelson, 2013). This does not resonate with the principles of the game theory that a decision of one player affects the results of the other. The game theory can therefore not apply because the players in a perfectly competitive market are price takers and not price determinants.
In addition, the game theory cannot apply because of the insignificance of the players’ entry or exit in a perfectly competitive market. In perfect competition, entry or exit of an individual player cannot influence either the market or change the results of other players in the market (Becker, 2015). Therefore, it is invalid to apply game theory that argues for the results of an individual player being determined by the decisions of other players.
References
Dufwenberg, M. (2011). Game theory. Wiley Interdisciplinary Reviews, 2: 2, 167–173
Becker, G. (2015). Perfect Competition. Wiley Managerial Economics. Vol 8:1, 14–29
Nelson, R. (2013). Demand, supply, and their interaction on markets, as seen from the perspective of evolutionary economic theory. Journal of Evolutionary Economics, January 2013, Volume 23, Issue 1, pp 17-38