Take the above example of game theory, a common example that explains the basics behind the theory. In this example, prisoners can either confess to a crime they committed, or deny that they had anything to do with it. If they both deny, they will serve the mandated two years. If they both confess, they are to spend three years in prison. If one confesses and the other denies, the one who confesses will be rewarded with only one year, while the one who denies will be sentenced to ten years. The most obvious thing to do would be to both deny, as that would lead to them both getting just two years. However, since they both can't be sure of the other denying, the most likely outcome is that both prisoners protect themselves from loss through confessing to the crime, which makes the worst scenario serving three years rather than a possible ten.
Economists can use this theory to predict the most likely outcome when oligopolies engage in behaviors such as price fixing and price wars. When an oligopoly must decide their quantity and pricing, they must consider what other competitors will do. If all the firms worry too much about the other and increase quantity, their average total costs may rise above their profits, causing a loss. If the firms think others will reduce quantity and do the same, they can get to the MC = MR point that monopolies set their price at in order to maximize profits. Using game theory, economists can anticipate based on past actions by a firm to predict what those firms will do in the future, which is helpful for investments or for other firms in the market to change their quantity and pricing.
https://www.investopedia.com/terms/g/gametheory.asp
https://www.mbacrystalball.com/blog/economics/game-theory/
https://www.tutor2u.net/economics/reference/oligopoly-game-theory
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