1. The Game Theory
The game theory as a mathematical field was founded by Hungarian mathematician John von Neumann, the author of the article named On Game Theory (1928), in which he proved basic sentences of matrix games. Together with Oskar Morgenstern they published the book of Game Theory and Economic Behavior in 1944 (Hykšová,
2004). Game theory was able to find most applications in economy. Many mathematicians were awarded the Nobel
Prize for Economy for research on this field.
The game theory is one of less known areas of exact mathematics, mingling with humanist sciences, with focus on the psychological aspect of the individual. Therefore, it is not only a useful tool in the hands of scientists, but also on fields that are more attractive to the lay public. However, it would be wrong to think that game theory is able to find a way to win at every conflict. When you are a part of the game and decide on the next steps, you need to take the choice of the others into account. However, when you think about their choices, it is necessary to count with that that they are thinking the same way. In the moment of coming up with own strategy reflecting the ideas of the other “players”, you need to know they are doing the same. And this goes on and on, as stated by Godin (2012). Simply said, according to Sawyer (2012), “the content of game theory is analysis of a very wide spectrum of decision influencing situations“.
The “prisoner’s dilemma” is a classic example of game theory (Godin, 2012). We rank it to the non-zero-sum games. The dominant strategy is non-cooperation, meaning that no matter what strategy the other player chooses, non-cooperation always results in better result for the player than cooperation (FAJRONT©2005). Below, we
describe an example of application of game theory, used to analyse a price war situation.
In economic recession, we can observe a specific competition war between two strong companies, creating a duopoly. These companies usually operate on a part of the market, being a monopoly there. During a crisis, these parts of market usually merge, creating an all-state market with for the product. The question is, whether it is better for the companies to accept the new power distribution or to try push the competition out and keep the previous monopoly position.
The answer? AC0 is the value of average costs of one company, AC´ being the value of average costs of two
companies. If AC´ is higher than AC0, the total costs would be significantly lower if the market of the product was monopolistic. Therefore, from the point of view of the companies, a fusion might seem to be a very attractive option. However, such a step would probably have to be investigated by the Anti-Monopoly Office. And let us not forget that many companies do not co-operate because of strong rivalry.
Another option is creation of competitive prices. A price war stars with declaration of one of the producers about significant price decrease with the aim to push out the competitor of the market. It is obvious that thanks to lower prices, the profits will not be maximised. However, the producer attacking first will acquire a significant portion of the competitor’s customers. The competitor has no other choice but decrease his prices, as well. But the price cannot drop under the cost limit, although the producer may sell his products with no margin.
During price war, both companies lose money. And at the end, one of them - usually the smaller, younger, less known one or the one with less significant backing - leaves the market. The company which stays, reclaims its monopolistic position, but with high losses the company might not recover from. The company which declared the price war counts with restoring the prices and heal its profit wounds, as soon as it reclaims the monopolistic position. In general, the longer the war takes, the higher the losses are and the higher the long-term profit must be. If the market as a whole develops well and healthy, it is usually better for the companies on it not to provoke a price war. It is clear that nobody wins in a price war – one of the companies has to leave the market and the other one is weakened and its war expenses have to be paid by the previously satisfied customers.