Game Theory
Game Theory and Business Game theory emerged as a scholarly field of study in the first half of the 20th century. Since that time, it has significantly affected various academic disciplines, such as economics, political science and biology. Although the term "game theory" may suggest a certain frivolity, the concepts underlying it have many real-world applications and offer a structured and logical method of considering strategic situations.
The parallels between competitive games and strategic business situations should be fairly obvious. Consider the game of chess. There are two players, each of whom makes moves in sequence. After observing the move made by the first player, the second player makes a counter move. Then the first player, having observed the first two moves, makes the third move and so on.
Compare this to the business situation of gas stations competing for customers through strategic pricing. (The players in this case are station A and station B.) Suppose, for instance, that station A starts by choosing a new pricing strategy. Given station A's decision, station B decides how it will set its prices. Given station B's response, station A can choose to revise its pricing strategy and so on. The objective of each gas station in this "game" is to maximise its own profit. For each to do so, it must be continually acting and reacting to its competitor in the market as well as anticipating competitive responses when making decisions. What does game theory have to offer?
First, game theory provides a framework, or formal procedure, for analysing any competitive situation (or "game"). Specifically, it forces you to identify the players in a game (consumers, sellers, input providers, governments, foreign organisations, etc.), their possible actions and reactions to the actions of other players, and the payoffs or rewards implicit in the game.
Game theory models reduce the world in which businesses operate from a highly complex one to one that
The parallels between competitive games and strategic business situations should be fairly obvious. Consider the game of chess. There are two players, each of whom makes moves in sequence. After observing the move made by the first player, the second player makes a counter move. Then the first player, having observed the first two moves, makes the third move and so on.
Compare this to the business situation of gas stations competing for customers through strategic pricing. (The players in this case are station A and station B.) Suppose, for instance, that station A starts by choosing a new pricing strategy. Given station A's decision, station B decides how it will set its prices. Given station B's response, station A can choose to revise its pricing strategy and so on. The objective of each gas station in this "game" is to maximise its own profit. For each to do so, it must be continually acting and reacting to its competitor in the market as well as anticipating competitive responses when making decisions. What does game theory have to offer?
First, game theory provides a framework, or formal procedure, for analysing any competitive situation (or "game"). Specifically, it forces you to identify the players in a game (consumers, sellers, input providers, governments, foreign organisations, etc.), their possible actions and reactions to the actions of other players, and the payoffs or rewards implicit in the game.
Game theory models reduce the world in which businesses operate from a highly complex one to one that