Game theory is a branch of mathematics that studies strategic interactions between rational decision-makers. In economics, game theory is used to analyze how individuals or firms make decisions in various situations where the outcome depends on the choices of others. It helps economists understand and predict behavior in markets, negotiations, and other competitive settings.
By using game theory, economists can analyze scenarios such as pricing strategies, competition between firms, bargaining situations, and the formation of cartels. This allows them to model and predict how individuals and firms will behave in these situations, helping them make more informed decisions.
Overall, game theory provides a framework for understanding strategic interactions and decision-making processes in economics, making it a valuable tool for economists and policymakers.