Intro to game theory

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Introduction to

Game Theory

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Image Source: Encyclopedia Britannica, Inc. 2006.


Interesting, but what is Game Theory?


§  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


Ok, but how does it impact Businesses?


§  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


Examples of companies using Game Theory


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


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)


Great, but global corporations can do all this. How does Game Theory impact SMEs?


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


Fantastic!! Even I want to explore and use Game Theory

to improve my business. What should I do?


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


… 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


Successful Business Strategy is about actively shaping the

game you play, not just playing the game you find

Thank You!! Contact

Vyom Shah M: +91-9158852515 E: [email protected]