Think of two period bargaining game in which a consumer and a seller trade a good. The consumer buys a good if its price p is less than the value 10. The seller sells a good if its price p is higher than the cost 5. The timing is like. The seller firsts offer p first then the consumer decides to take or leave. If the consumer takes it, its payoff is p-c for the seller and v-p for the consumer. If it is rejected, the consumer offers another offer p2 to the seller. Again, if the seller accepts, the payoff is p2-c for the seller and v-p2 for the consumer. Moreover, there are discount factors delta 1=0.8 for the seller and delta 2=0.7 for the buyer in the second period. 1) In the 2nd stage (i.e. when the buyer offers p2), the consumer offers p2= 2) In the first stage, (i.e. when the seller offers p), the seller offers p= 3) At the equilibrium, the payoffs are that the buyer's payoff is and the seller is supposed to accept all offer if p2 is greater and equal to and the buyer takes all offers if p is less than equal to while the seller's payoff is

Definition Definition Economic decision-making framework that analyzes how different players optimize their outcomes with given pay-offs corresponding to their available strategies. The assumptions of game theory are: The number of players or competitors are finite/limited; All participants are rational The rules of the game are known to every player; and Each participant has a finite set of actions. A common way in which game theory is presented as an ( m x n ) matrix in which m represents the strategies of row player and n represents the strategies of column player. There are several limitations of game theory: Many businesses have a large number of competitors, and selecting an optimal strategy in these circumstances is difficult; Real-life business operating environments are full of uncertainty and difficult to model as a game theory; and The assumption of rationality and utility maximization isn't always an accurate portrayal of human nature.