believed that if a full-fledged theory of games could be developed,

it might provide a much better understanding of oligopolistic

behaviour than that offered by the traditional theory. In later
developments, games theory was advanced by work of a number
of scholars; the most significant achievement was the publication
in 1944 of John von Neumann and Oskar Morgenstern's
monumental "The theory of Games and Economics Behaviour."

Some Preliminary Definitions:

A strategy is one firm's plan of action adopted in the light
of its belief about the reaction of its rivals. The players in the game
may be thought of as the firms or their managers comprising the
oligopoly industry. The players make their moves when they
actually decide on the strategy to be employed. Thus, when A
decides to be a follower, that is his move. The play of a firm
consists of a detailed description of the firm's activities in carrying
out its move. Thus, if two firms, A and B, decide to form collusive
oligopoly, their play would be description of how they made their
decision to collude, how they propose to carry it out, and so forth.

The pay-off of game or strategy is the result of the player's

moves. It may be defined as the not gain a strategy will bring to
the firm for any given counter strategy of the rivals.

The pay-off matrix of a firm is a table showing the pay-offs

coming to it as a result of each possible combination of strategies
adopted by it and by its competitors.

In the theory of games, the firms in oligopolistic markets are

treated as players in a chess game; to each move by one player,
the other may choose among several counter moves. The
counter-moves of rivals are probable but not certain. Yet, it is
possible to choose a strategy which will maximise the firm's
expected gain, after making due allowance for the effects of rival's
probable reactions.

Two-Person Zero-Sum Game:

The simplest model is a duopoly market in which each firm
tries to maximise its market share. Given this aim, it is clear that
whatever one firm gains, the other losses. In other words, any
gains of one firm is cancelled by the loss of the other firm so that
the net gain is zero. Hence the name Zero-sum game. Since only
two persons or firms are involved, it is called a two person game.

This model is based on the following assumptions.

Assumptions:
1. The firms have only one goal, namely, to maximise their
market share.