Behavioral economics & game theory in managerial microeconomics Research Paper

Behavioral economics & game theory in managerial microeconomics - Research Paper Example Consequently, rules are set in a complex manner to ensure a win-win situation for all. This creates difficulties and necessitates systematic analysis prior to the actual occurrence of the situation. In some cases, challenges might arise when a situation is in progress, creating much complexity leading to multiple systems being set up to counter the challenge. In managerial microeconomics, managers face similar situations especially in marketing of products and services. Competitors may keep changing their tactics, in order to keep up with the changing trends in the market. Competitors actions as well as micro and macroeconomic factors beyond the control of firms such as government policies on taxation, social corporate welfare, interest rates, and currency deflation or inflation creates complexity in the business world. In addressing the above challenges among others, managers must thus adopt a game like approach. Representing and Solving Games by Managers in the Business World Assum e the following payoff scenario Company a’s actions High price Low price Company B’s action High price 200A 200B 200A -40B Low price -40A -120B 100A 50B Solution If company B has set a high price then A chooses low price, the B high/Ahigh approach can be ignored. If B sets a low price, then A chooses a low price, the Blow/ Ahigh branch will be impractical. Consequently, B is forced to choose between high price (-40) and a low price (50). In these two scenarios, A must follow B price strategy because they are the dominant strategies. The above scenario illustrates a number of key ideas for managers. In decision making, a set of strategies such that each is best for each player, given that the others are playing their own equilibrium is the...This research paper analyzes the place of game theory and behavioral theory in managerial economics in isolation, then integrates them together, in applying their arguments in addressing real business situations Game theory is complex and involves a lot of difficulties in reasoning A game is any circumstance comprising interdependence amongst players. There are different types of games. This study focuses on co-operative versus non-co-operative games because they involve competition among economic entities, challenging leaders and their management skills. They are characterized by aggressive competition in the business world. Behavioral economics assimilates psychology and economics by recognizing systematic inconsistencies in decision making. These are now recognized to be an essential basis of error in business decisions, they deliver the underpinning for both marketing and finance. At the principal of behavioral economics is the principle that increasing practicality of the psychological underpinnings of economic exploration will improve economics on its own terms, creating theoretical insights, making better predictions of field phenomena. Managerial economics encompasses use of economic approaches of thought to scrutinize business condition. It is the incorporation of economic theory with business practice for the resolve of aiding decision making and accelerative forecasting. In attempts to making optimal decisions, managers should be open minded and extremely flexible, as there is no individual with optimal knowledge.