An Introduction to Game Theory

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Introduction to
Game Theory

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Prisoner’s Dilemma
2

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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
ComplementorsSubstitutors
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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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: vyom.shah@phronesisstrategies.com