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Copyright © 2013 PHRONESIS STRATEGIES. All Rights Reserved www.phronesisstrategies.com
Prisoner’s Dilemma
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Image Source: Encyclopedia Britannica, Inc. 2006.
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Interesting, but what is Game Theory?
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§ Mathematical model of human interactions in situations of conflict and cooperation
§ Systematic way to understand the behavior of players in situations where their fortunes are interdependent
§ Centuries old, but it’s current form was given shape by John von Neumann and Oskar Morgenstern in 1944
§ Moved from being a mathematical construct and founded applications in Economics, Political science, Pyschology, Philosophy, Biology, Ecology, Engineering, Computer Science, Sports, International relations, Negotiations, Trade agreements, Decision making, Businesses etc.
§ John Nash won the Nobel Prize in Economics in 1994 for developing a crucial concept – “Nash Equilibrium” in non-cooperative games
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Ok, but how does it impact Businesses?
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§ No man is an island
§ Businesses comprise of repetitive interactions between multiple stakeholders (players)
§ where choices & actions of one player has direct consequences on others
§ Hence, important to understand the choices available to you and others, and ‘payoffs’ of such choices
§ Game Theory helps to analyze such choices and devise our strategies
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Examples of companies using Game Theory
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Trans World Airlines – Case Study
§ In 1990s, American Airline Industry plagued by Overcapacity, leading to Price wars, resulting in inferior service and less satisfied passengers
§ Traditional approaches to Add Value: Tailor product to customer’s needs, Build a brand, use resources more efficiently, work with suppliers to lower costs etc.
§ In 1993, TWA removed 5 – 40 seats per plane, giving passengers more legroom. Soon, it occupied 1st place in Customer satisfaction for long haul flights.
§ Other airlines copied this. Excess capacity from industry was removed. Price wars stopped. Airlines stopped flying empty seats around.
§ Passengers got more legroom. Overall customer satisfaction increased. Everybody wins.
§ TWA changed the Game
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Changing the Game
§ Companies can succeed spectacularly without requiring others to fail
§ And they can fail miserably no matter how well they play, if they make the mistake of playing the wrong game.
§ Most people focus on own position. Primary insight of Game Theory – Focus on other player’s actions too. Put yourself in shoes and heads of other players.
§ Look forward and reason backward.
§ Cooperation + Competition = Coopetition (Seeking win-win and win-lose opportunities both)
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Great, but global corporations can do all this. How does Game Theory impact SMEs?
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Publicly smart, not just privately
§ An Indian farmer secured the best corn seeds
§ However, instead of using the seeds himself and growing the best variety of corn, he distributed the seeds to his neighbors. Why?
§ "The wind picks up pollen from the ripening corn and swirls it from field to field. If my neighbors grew inferior corn, cross-pollination would steadily degrade the quality of my corn. If I am to grow good corn, I must help my neighbors do the same."
§ Result: The farmer’s corn won top awards year after year
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Fantastic!! Even I want to explore and use Game Theory
to improve my business. What should I do?
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Elements of a Game (PARTS)
Players:
Added Values: what each player brings to the game. There are ways to increase your added value or lower added value of others.
Rules: might arise from law, customs, contracts etc. Players may be able to revise or add new rules.
Tactics: Moves to shape the way players perceive the game and their actions. Can be used to reduce misperception or create uncertainty.
Scope: Boundaries of the game. Possible to expand or shrink those boundaries.
Company
Customers
Suppliers
Complementors Substitutors
Value Net
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… and explore
References & Bibliography
§ Brandenburger, A. and Nalebuff, B. (1995) The Right Game: Use Game Theory to Shape Strategy, Harvard Business Review
§ Raghunathan, V. (2007) Games Indians Play: Why We Are the Way We Are, cited in India Knowledge@Wharton
§ Shor, M. (n.d.) Game Theory & Strategy, Lecture notes, Vanderbuilt University
§ Lindstadt, H. and Muller J. (2010) Making game theory work for managers, McKinsey Quarterly
§ Watson, J. (2008) Strategy – An introduction to Game Theory. 2nd ed., W.W. Norton & Co., New York
§ www.gametheory.net
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