How does game theory explain the concept of cooperation and competition in economic interactions?

How does game theory explain the concept of cooperation and competition in economic interactions?

Game theory explains the concept of cooperation and competition in economic interactions by analyzing the strategic decision-making of individuals or firms. In game theory, economic interactions are modeled as games where players make choices based on their own self-interests and the anticipated actions of others.

Cooperation is explained through the concept of a cooperative game, where players can form coalitions and work together to achieve a mutually beneficial outcome. This can be seen in situations where players collaborate to maximize their joint payoffs, such as in the formation of cartels or alliances.

Competition, on the other hand, is explained through the concept of a non-cooperative game, where players act independently and pursue their own interests. This can be seen in situations where players compete for limited resources or market share, such as in price wars or bidding processes.

Overall, game theory provides a framework to understand how individuals or firms strategically interact in economic situations, considering both cooperative and competitive behaviors.