In about its relevance.’ It is difficult to justify

In the Monarch case advances in technology
modified the rules of the game, affecting Monarch’s payoff and required Monarch
to adapt to remain afloat. The use of game
theory identifies aspects that each participant should consider before choosing
an action, allowing informative decisions to be made. The basic model of game
theory informs us that the game needs to be identified: who are the players,
what are their actions and what are their individual objectives. However, application
of game theory has conveyed that it cannot
provide concrete advice in real-life situations, ‘the
theory fails to help us understand how individuals react to
counter?theoreticals in dynamic interactions.’ (David M. Kreps). Game
theory includes the assumptions that; all players act rationally, rivals
act out of self-interest, there is conflict of interest between the players and
that the rules of the game are collectively known. Game theory also has the assumption
that players have common knowledge and beliefs while ignoring factors such as social norms, consideration
of personal characteristics and bias. ‘The number of adjustments needed
to build a behavioural game theory is so vast that it cannot yield generalizable
models.’ (Lucas, McCubbins and Turner
2015). It has been proven that this is inaccurate as ‘people do not choose consistently, do not hold consistent
beliefs, and do not in general align actions and beliefs.’ (Lucas, McCubbins and Turner 2013). The assumption
of rationality is a limitation of the theory which leads to the production of
anomalies. Rationality fails to explain obvious characteristics of human
interaction and breaks down completely in certain cases, as the theory argues that cooperation between players is
always the rational strategy. Another
flaw in game theory is the focal point selection in pure coordination games
which is incomprehensible and an unreliable technique in making important
business decisions. The theory does not mimic the real world and is
therefore not applicable for analysing real world situations.  Ariel
Rubinstein claims that ‘applications of game theory are simply attaching labels
to real-life situations’ and states ‘I would say there were too many claims
made by game theoreticians about its relevance.’ It is difficult to justify
this pay-off dominance principal thus is not relevant and cannot help to solve
real world problems, such as the Monarch administration as there is no apparent
nor obvious salient solution provided.

Agency theory and asymmetric
information conveyed the problems of Monarch’s lack of signalling, the secrecy
around dealings and ultimately the collapse of the airline. Agency theory
allows economists to understand the relationship between the agent and the
principal thus highlighting the problems that can occur namely the principal
agent problem which can result in levels of mistrust or misunderstanding.
Through agency
theory control mechanisms are necessary for controlling opportunistic managerial
behaviour, although research proves that controls can generate stronger
individualistic behaviour and ultimately results with distrust. This occurs when there is a divide between the
interests of the principal and the interests of the agent. This divide can also
represent a difference in knowledge and information. To achieve a perfect
representation of company interests this theory requires a perfect knowledge of
the business’s best interests and how to reach fulfilment. The application of
agency theory eliminates the act of opportunism resulting in failed
opportunities should the agent not take the risk or opportunity in present
time, such as Monarch’s failed opportunity to update their business model with
new technology. ‘Even in circumstances of
highly specific assets, where the probability of opportunism is extremely high,
there are individuals who will give priority to cooperation and trust and will
not initiate opportunistic behavior’ (Podrug, Filipovic, Milic 2010).
Alternatively, opportunism can conduct negative impacts on a business model as
it can encourage illegitimate or illegal methods of acquiring assets. 

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