Guide Game theory and business applications

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Module Overview
  1. Game Theory and Business Applications
  2. Can Game Theory Improve Business Strategy? | Welcome to the Real World!
  3. Applied Game Theory For Your Day-To-Day Business Operations
  4. What do you Think?

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Identify the two types of business activities: rule-based and non-rule based Think like their rivals and anticipate their moves Find synergies with the competition. Discover More. Course Author. Associate Professor. Management Business Strategy.

Game Theory and Business Applications

Act today—courses are filling fast. The interrogators make it a point to inform both suspects that the other is fully aware of the deal and its connotations. If the two suspects decide to defect and make a confession, they will both get the full brunt of the punishment and be sentenced the standard jailtime. If, however, one suspect confesses and the other stays quiet, it is the latter who will get the jail sentence — often even longer — while the one who confessed gets off with a lighter sentence, or even walks away scot-free.

Both companies are aware of each other as long-time competitors, and that they will be playing the same game for a long time to come.

Can Game Theory Improve Business Strategy? | Welcome to the Real World!

Thus, they have the choice on whether to cooperate with each other and kept their prices higher, or they could engage in mutual price-chopping actions. Many assume that Game Theory applies only to getting the pulse of competitors.

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However, it can also apply to the relationship of companies with their supply chain partners. Supply chain management can be facilitated by Game Theory concepts. The game can be played in one of two ways. A non-cooperative game is where the players are unable to make binding commitments before making a choice or deciding what strategy to implement. On the other hand, making such commitments is possible in a cooperative game , which means that players can form coalitions and make side-payments.

Let us say, for example, that there is only one wholesaler of Product A.

All retailers will source their inventory from this single supplier. If there is more than one supplier, however, it becomes a different ball game altogether. There are now two suppliers competing for product availability. If the first supplier has unavailable stocks, or are unsatisfactory, the retailers can turn to the other supplier. The payoffs enjoyed by the two players will differ, dependent on several factors such as demand, price and customer satisfaction.

Taking into account the Game Theory assumption that all players are acting on their self-interests, it is important to note that their individual choices, when taken as a whole, do not always mean that the supply chain is optimized, or that it is able to enjoy an optimal payoff. Consider the fact that there are multiple players, or companies; this means that the supply chain is decentralized.

If you compare it to a centralized chain, with only one or two suppliers, there is a significant difference between the profits. Obviously, the profits in the decentralized supply chain will be lower than that of the centralized chain. A performing company is able to provide value to its stakeholders and shareholders.

In order for the company to perform well, top management — all the way down to the rank-and-file — are expected to pull their weight. It is a collective effort, as all are working for everybody, instead of one group focusing on its own compensation without care for the others. Game Theory has been applied in efforts to create compensation schemes that effectively align the interests of all stakeholders of the company: the managers and the workers the agents , and the shareholders the principals.

It is a given that the shareholders do not have direct control over the actions of the managers and the workers of the company.

Applied Game Theory For Your Day-To-Day Business Operations

They also cannot directly monitor them. That does not mean, however, that they are entirely helpless. By offering incentives, they can have a say — albeit indirectly — on how the managers and the workers should act. These are commonly seen in the relationships between real estate agents and prospective property and home buyers, and that of franchisees and franchisors.

Through Game Theory, we are able to get more than a glimpse of the interactions of agents and use the information obtained in making strategic decisions. Entrants to new markets are faced with many questions and dilemmas. This is a decision so huge that a significant amount of research, information-gathering and analysis is required. Say, for instance, that Company B is looking to enter a new market in a South American country. Currently, there is one similar firm — Company A — operating in that market. Company B will have to consider all the possible reactions of Company A.

Company A can choose to welcome Company B, letting it get a share of the market it used to solely own. Or Company A can choose to start a price war with Company B, cutting its prices in order to maintain its stake on the market. Through Game Theory, Company A can decide whether it would be accommodating to Company B, or if it would be aggressive. Drawing a game tree using the information available in order to see what strategy would be most beneficial or have the bigger payoff.

What do you Think?

Granted, Game Theory might not be the best or most recommended analysis tool out there for businesses, but no one can deny its usefulness when it comes to day-to-day business operations. E-mail is already registered on the site. Please use the Login form or enter another. You entered an incorrect username or password. You have to make sooo many choices in life. So, if you want to become a successful entrepreneur, …. After tons of meetings, follow up emails and numerous phone calls, you finally got the contract …. Not yet a member? Sign Up. Find your dream job. Get on promotion fasstrack and increase tour lifetime salary.

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