When applied to economics, game theory attempts to explain the behaviour of interdependent firms operating under conditions of uncertainty. A game has three elements - players, pay-offs and strategies - all of which exist in real markets and market interaction. Game theory can be used successfully to help generate a better understanding of how and why decisions are made by oligopolists in pursuit of their objectives - such as whether to compete or collude, or raise price or lower price. Game theory can also be used by regulators to help decide whether to regulate, and to assess the likely effect of fines or penalties on the behaviour of firms.
Read more on Game theory