Game Theory in International Economics

Game theory in international economics

JOHN McMILLAN¹(Revised July, 1984)

1. STRATEGY AND TRADE

THE THEORY OF GAMES provides a set of mathematical techniques for analyzing situations in which each agent’s utility depends not only on his own actions but also on the actions of others; and all of the agents take these interdependencies into account when deciding their actions. Von Neumann and Morgenstern explained the difference between a game-theoretic problem and an optimization problem of the sort more traditionally solved in economic theory, such as a single consumer’s maximization problem:

Consider now a participant in a social exchange economy. His problem has, of course, many elements in common with a maximum problem. But it also contains ...