An Application of Game Theory to Electronic Communications Markets

This article gives an introductory survey of non-cooperative game theory. Its central concepts are illustrated by means of examples, often with reference to economic and business situations in information and communication technology. Game theory provides a number of insights. Selfish behavior may lead to inferior outcomes for all players, because a more cooperative solution is not stable with respect to individual changes in behavior. The concept of equilibrium captures this stability. Game trees represent dynamic interactions, as illustrated with an example of market entry and entry deterrence. A game may have more than one equilibrium, which is important to note when predicting the outcome of an interaction. Different technologies may be adapted as equilibrium solutions due to the number of users already using a technology, as shown with the “bandwidth choice game”. The rules of the game matter, for example when introducing commitment power in the “quality game”. Players may have different information about scenarios, and it may be optimal to hide that information from an opponent by actively randomizing one's actions. In network routing, selfish behavior may lead to congestion, which can even become worse when increasing network capacity. These concepts and examples show the versatility of game theory for analyzing the dynamics of markets and the interactions of cooperating and competing participants.