18.4 : Zero-Sum and Non-Zero-Sum Game

Within game theory, games can be categorized as zero-sum or non-zero-sum games, based on how gains and losses are distributed among players. In a zero-sum game, one player's gain equals another player's loss, meaning the total amount of resources or benefits remains constant. For example, in a bidding war for a contract, if one company wins, the other loses out entirely, reflecting the fixed outcome of zero-sum games.

Non-zero-sum games differ because gains and losses are not perfectly balanced. In these games, it's possible for all players to either benefit or lose together. Non-zero-sum games can be further divided into positive-sum and negative-sum games.

Positive-sum games occur when all participants can receive gains, with the total outcome being larger than the losses. For instance, when two firms collaborate on a new technology, both may increase their market shares, leading to a situation where both profit from the partnership.

Negative-sum games, by contrast, involve scenarios where the total losses are greater than any individual gains. For example, during intense market competition, companies may engage in price wars, lowering their prices so much that, even if one company captures more market share, the overall profits for all players decrease due to reduced margins.

Understanding zero-sum and non-zero-sum games helps explain different strategic situations, whether competitive or cooperative, and provide insights into the resulting outcomes for those players involved. These distinctions are essential in understanding how different strategies impact overall outcomes. By identifying the type of game, players can better predict the potential benefits or losses and adjust their approach accordingly.