All of this information is compared to the current performance of the organization in question, the market, the competitive landscape, and the technologies in use.

Risk analysis makes use of game theory in determining optimal price strategy, expected market shares, expected income, and the number of customers. While each organization may employ a different algorithm, the benefits that each organization stands to reap from its application include: The Benefits of Algorithmic Game Theory in Business OperationsĪs the corporate landscape and needs of consumers become more complex, business leaders are focusing their efforts on developing efficient algorithms for optimization in economic environments.Īlgorithmic game theory offers an approach for organizations to: 1) model strategies and 2) leverage mathematical tools for data analysis. If neither Prisoner A nor Prisoner B confesses, both prisoners will be charged with misdemeanors and will be sentenced to one year in prison.

If Prisoner A and Prisoner B both confess, both prisoners will be sentenced to five years in prison.

If Prisoner A does not confess but Prisoner B does, Prisoner A will be convicted and the prosecution will seek the maximum sentence of 10 years.

If Prisoner A confesses and agrees to testify against prisoner B, who does not confess, the charges against Prisoner A will be dropped and they are free to go.

This means that each prisoner cannot see or communicate with the other.Ī police officer then individually offers each prisoner a deal with the following terms: Each prisoner is kept in a completely isolated prison cell. In the case of the prisoner’s dilemma, let’s say that two guilty prisoners have been arrested for shoplifting.

The prisoner’s dilemma is debatably the most well-known example of game theory and it remains the most popular example to illustrate the concept of game theory in a real-life scenario. Game Theory in Action: A Use Case Example

Game theory situations in real life