Recent research has shown much progress in the theory of games and its applications to economic analysis, particularly to situations involving bargaining. However, it has become evident that some parts of this theory are likely to be relevant in realistic economic applications, and other parts show little explanatory or predictive power. What remains unclear are the circumstances under which even the simplest and most fundamental principles of game theory can be expected to be useful as part of a genuinely predictive theory of human behavior. This research examines the precepts of game theory, namely the information available to the players either at the outset or through learning, the rules of the game, and the likely outcomes, in a systematic and rigorous manner. Starting with a two-person zero-sum game, the experiments become more complex to include multi-stage bargaining games and auctions. At each phase of the work careful analysis is done to allow for the the effects of the environment of the game and the experience of the players on the outcome. %%% One of the fundamental contributions to the analysis of human behavior is the 1928 work of John von Neumann in which the concept of human interaction modeled as a game between players is developed. The game has rules which must be followed and penalties for breaking the rules. Each player has varying amounts of information about the game, the other players, and the likely outcomes of strategies. In this environment the players react to incentives provided by the rules of the game, and endeavor to guide the game to an outcome in concert with their own interests. During the past several decades game theoretic analysis has been widely applied to economic environments including cartel formation and stability, auctions and bidding, international trade, market analysis, contracting and other types of bargaining, and the formulation of government policy. However, the results of game theoretic studies have often been questionable when they are used to explain economic behavior or predict the future behavior of economic agents. In particular, game strategies which seem optimal in the short run often break down over the longer term. The contribution of this project is that it examines game theory applications to economic analysis from a fundamental standpoint. It explains what aspects of game theory are in concert with the basic precepts of economic theory. This research also isolates the properties of game theoretic analysis which are inherently flawed from the standpoint of economic behavior, and when applied to economic problems will lead to ambiguous or erroneous conclusions.
