In the Monarch case advances in technologymodified the rules of the game, affecting Monarch’s payoff and required Monarchto adapt to remain afloat. The use of gametheory identifies aspects that each participant should consider before choosingan action, allowing informative decisions to be made. The basic model of gametheory informs us that the game needs to be identified: who are the players,what are their actions and what are their individual objectives.
However, applicationof game theory has conveyed that it cannotprovide concrete advice in real-life situations, ‘thetheory fails to help us understand how individuals react tocounter?theoreticals in dynamic interactions.’ (David M. Kreps). Gametheory includes the assumptions that; all players act rationally, rivalsact out of self-interest, there is conflict of interest between the players andthat the rules of the game are collectively known. Game theory also has the assumptionthat players have common knowledge and beliefs while ignoring factors such as social norms, considerationof personal characteristics and bias. ‘The number of adjustments neededto build a behavioural game theory is so vast that it cannot yield generalizablemodels.’ (Lucas, McCubbins and Turner2015).
It has been proven that this is inaccurate as ‘people do not choose consistently, do not hold consistentbeliefs, and do not in general align actions and beliefs.’ (Lucas, McCubbins and Turner 2013). The assumptionof rationality is a limitation of the theory which leads to the production ofanomalies. Rationality fails to explain obvious characteristics of humaninteraction and breaks down completely in certain cases, as the theory argues that cooperation between players isalways the rational strategy. Anotherflaw in game theory is the focal point selection in pure coordination gameswhich is incomprehensible and an unreliable technique in making importantbusiness decisions. The theory does not mimic the real world and istherefore not applicable for analysing real world situations. ArielRubinstein claims that ‘applications of game theory are simply attaching labelsto real-life situations’ and states ‘I would say there were too many claimsmade by game theoreticians about its relevance.
‘ It is difficult to justifythis pay-off dominance principal thus is not relevant and cannot help to solvereal world problems, such as the Monarch administration as there is no apparentnor obvious salient solution provided.Agency theory and asymmetricinformation conveyed the problems of Monarch’s lack of signalling, the secrecyaround dealings and ultimately the collapse of the airline. Agency theoryallows economists to understand the relationship between the agent and theprincipal thus highlighting the problems that can occur namely the principalagent problem which can result in levels of mistrust or misunderstanding.Through agencytheory control mechanisms are necessary for controlling opportunistic managerialbehaviour, although research proves that controls can generate strongerindividualistic behaviour and ultimately results with distrust. This occurs when there is a divide between theinterests of the principal and the interests of the agent. This divide can alsorepresent a difference in knowledge and information. To achieve a perfectrepresentation of company interests this theory requires a perfect knowledge ofthe business’s best interests and how to reach fulfilment. The application ofagency theory eliminates the act of opportunism resulting in failedopportunities should the agent not take the risk or opportunity in presenttime, such as Monarch’s failed opportunity to update their business model withnew technology.
‘Even in circumstances ofhighly specific assets, where the probability of opportunism is extremely high,there are individuals who will give priority to cooperation and trust and willnot initiate opportunistic behavior’ (Podrug, Filipovic, Milic 2010).Alternatively, opportunism can conduct negative impacts on a business model asit can encourage illegitimate or illegal methods of acquiring assets.