Managerial Economics and Strategy, 2/e

12.3 Information and Rationality

“All that I have to say has already crossed your mind,” said [Moriarty]. “Then possibly my answer has crossed yours,” I replied. —Sherlock Holmes (Sir Arthur Conan Doyle)

Game theory focuses our attention on the crucial role that information plays in a firm’s decision-making process. In some situations it makes sense to assume that players have full information about the profits and possible strategies of other players, and that they have full information about how much other players know. For example, our discussion of American and United Airlines assumes that both airlines have the same costs and demand functions, so that each knows virtually everything that the other firm knows. In other situations, particularly ...