1) Game theory is a fundamental part of decision-making for businesses, whether decisions are sequential or simultaneous. However, outcomes are difficult to predict as they depend on competitors' decisions. 2) Game theory can be applied to oligopolies and duopolies where firms are interdependent, but is less useful for monopolistic competition where one firm's actions don't significantly impact others. 3) In sequential games, where one player chooses before others, businesses can use tree diagrams to predict outcomes and reduce risk, though these are difficult to apply in practice.

1. GAMETHEORY: BEST WAY TO PLAY?
Game theory1
isa fundamental partof decision-makingforbusinesseswhetheritissequentialorsimultaneous
decision-making.Althoughbeingavital partof the decisionmaking, itisstill difficulttopredictthe outcome,asthe
outcome of the game itself iscompletelyrelianton each‘game player’s’decision. Thusanalysingafirm’ssituation
and theircompetitorsprovestobe acrucial part of the game. Game theorycan be appliedtomanydiffering
circumstances,howeveritmustbe notedthatis doesnotwork foreverybusinessanditisnotentirelyreliable in
predictingthe outcome.(ManishYadav:Game theoryanditsbusinessapplications)
Whoit appliesto and who it does not apply to
‘The classical example of game theoryinthe businessworldariseswhenanalyzinganeconomicenvironment
characterizedbyan oligopoly’(ArthurPinkasovitch, 2009) such as large competingbusinessese.g. supermarkets.It
can alsobe applied toduopolies suchasMasterCardand Visa.It isparticularlyimportantfor businessesin these
marketsbecause the behaviourof eachbusinessis inter-dependentoneachothercausingthemto be mutually
dependent.Therefore the actionbyone businesshassignificantimpactsonthe otherswhich mayleadtochangesin
the behavioursof the othersinresponse tothe action.Thisiswhyit isalmostimpossibletopredictthe ‘payoff’2
of
an actionas it iscompletelyreliantonhowthe othersreact.To try to reduce the alienationof knowingwhatwill
happen,businessesuse Game Theorytotry to predicttheircompetitor’sreaction. (GattonLecture 7
(gatton.uky.edu/Faculty/hoytw/610/610-07.ppt))
Game theoryishard to applyto a monopolisticcompetition (inwhichthere are manysmall competingbusinesses)
such as hairdressers,because there are somanyfirmsinthe market; one firm’sactioncannotsignificantlyimpact
anotherfirm,whichwouldbe seeninoligopoliesandduopolies.Thisisbecause of the large extentof diversification
whichcan be found inthe monopolisticmarket.Therefore the firmsare lessinclinedtotake intoaccountthe
responsesof whatmaycome about bytheircompetitorsasa resultof theiractions;thusprovingthat Game Theory
wouldbe of little use tothem.(MONOPOLISTICCOMPETITION,OLIGOPOLY,&GAME THEORY
(www2.palomar.edu/users/mzahui/.../Lecturech11swcEcon102.ppt))
Sequential games
Where game theorycan be of use isin sequentialgameswhichisagame where one playerchoosestheiraction
before the otherschoose theirs. SørenKierkegaard3
statesthat“Itis true that life mustbe understoodbackward,
but… itmust be livedforward”(JournalsIV A 164, 1843). To try to representsuchstatement tohelpbusinesses in
large competingmarkets reduce risk,abusinesscoulddesigntree diagramstopredictwhatwill happeninthe future
as it makesiteasiertothinkbackwards.Inpractice itis hardto complete suchactivitywhereastrimmingback
brancheson a tree diagramis easiertounderstandandshow4
.(Michael Malcolm(2011) Unit7.3: Sequential Games)
The rule of 3 isone example of sequential decision-making.The reasonbeingisthatwhenyoumake a decision,you
have to depend itonwhat will happenafter.Thiscouldbe seenaschallengingif youare the firstbusinesstodecide.
Howeverbygoingfirstcouldprove tobe advantageous asshowninthe followingexample: The rule of 3 isusually
representedbythe breakfastcerealideainthatcerealsare becomingalotsweeterintaste (thismaybe causedbya
1 The branch of mathematics concerned with the analysis of strategies for dealingwith competitive situations wherethe
outcome of a participant'schoiceof action depends critically on the actions of other participants.Game theory has been app lied
to contexts in war, business,and biology. (http://www.oxforddictionaries.com/definition/english/game-theory)
2 Return on the investment.
3 Søren Aabye Kierkegaard was a prolific19th century Danish philosopher and theologian. –
(http://www.goodreads.com/author/show/6172.S_ren_Kierkegaard)
4 In this way of lookingat things a business mustanalyseevery outcome. However the example of tree-diagrams is hard to apply
to businesses other than political parties wantingvotes to get into power. This type of business isnotexpressed in this essay,
thus the pointis not expanded.

2. higherdemandforthe sweetercereal)5
.Forexample abusinessmaybeginwithlesssweetcerealsyetearna profit
of £150,000 (withcostsbeingaccountedfor).Thisisasteadymarket,but due to the global trend of sweetercereals,
there isan opportunitytoproduce more sweetcerealsinwhichintheorythe new targetmarketshoulddouble
profitsascosts do not rise astheyare fixedwhichalsobenefitsthe businessinthe factthat theygaina cost
advantage of economiesof scale6
.The profitintheoryshoulddouble to a£300,000 profit.
One may believe there isanopportunitytotriple the original profitsbymakingacereal betweenthe sweetcereal
and the lesscereal.However,one wouldbe mistakenforthe reasonthatthe ‘middle’cerealwouldoverlapthe two
othertypesof cereal.This thenwouldleadtolessprofit thanthe previous£300,000 as oneach overlapthere would
be £120,000 loss;totalingtoa lossof £240,000 from theirestimated£450,000 profit;thisisbecause the companyis
makingmore than isneeded/demanded.Thiswouldresultina£210,000 profitwhichisevidentlyworse thanthe
previous£300,000. Instinctivelyone wouldwanttoavoidthisoptionaltogetherasitmeanslessprofitfrom
producingmore.
However,bylookingforwardandassumingthatacompetitormayenterthe marketone chose to holdback from;
one’sbusinesswill seeadropin theirprofitastheygaina lossonwhere the competitoroverlapsontheirmarket.
Thiswouldcause themto lose £120,000 from their£300,000 profitlandingthema £180,000 profitwhichisworse
than the £210,000 profittheywouldhave gainedfromenteringthatmarketthemselves.Thereforethe businesshas
a predicamentinwhethertorisklosingthe optimumprofitto preventacompetitormakingthemlose evenmore
moneyor whetherto holdontothat optimumprofitinthe hope thata competitorwill notenterthe openmarket.
Thisshowsthat the business hasa sequential businessdecisiontomake and shouldalwaysconsiderthe riskfactorof
itsdecisionbefore makingit.Inthe longrun,it isadvisable thatthe businessshouldtake the low riskoptionof
targetingthe newmarket;butwhento take the decision,the businessshouldanalyseall of itsviable competitors
whichcouldgive a clearerindicatorof whentotake the decision.Toconclude, thinkingforward misseschancesto
make money and/orpreventlosses.Inthisexample,by thinkingforward,we see thatcheatingtostayaheadcould
be the saferoption. (Mike Shor(2001-2008) Lecture 4: Game Theory:Sequential Entry –BreakfastCereals)
Market concentration
But cheatingisnotalwaysthe saferoption.Where a marketismore concentratedwithmore firmsinan industry,it
can resultinsustainingcooperationtobe a highlydifficultachievementandthuscheatingcouldbe detrimentaltoall
participants(the businesses) inthe game.
Firmsinan industry can choose to compete orcollude7
. Bycolluding,the monopolyprofitof whichone business
wouldearnif theycontrolledthe marketcanbe evenlydividedbetweeneachfirm.However,manybusinessesare
profit-drivensomaystrive tocontrol the whole marketinorderto collectall the profits.Fora businesstoobtain
this, theywouldhave tocheatin the game.In thisexample,the cheatingwouldbe tocharge a slightlylowerprice for
itsproductsthan its competitorswhichwouldallow thatparticularbusinesstocapture all the consumersalongwith
all the profits.This ideaiscalledprice skimming8
.Howeverthe punishmentforsuchcheatingwill leadtoasevere
5 (The Huffington Post): report that many cereals you often think of as healthy (grain flakes or certain brands of granola) actually
have more sugar than Fruity Pebbles. In fact, some of the cereals they studied contained as much sugar as you need for the
entire day. – showingcereals aregetting sweeter.
6 The cost advantagethat arises with increased output of a product. Economies of scalearisebecauseof the inverse relationship
between the quantity produced and per-unit fixed costs; i.e. the greater the quantity of a good produced, the lower the per-unit
fixed costbecause these costs are shared over a larger number of goods. –
(http://www.investopedia.com/terms/e/economiesofscale.asp)
7 To acttogether secretly to achieve a fraudulent, illegal, or deceitful purpose; conspire(e.g. to come together on a fixed price) -
(http://www.thefreedictionary.com/collude)
8 An approach under which a producer sets a high pricefor a new, high-end product or a uniquely differentiated technical
product. Its objective is to obtain maximum revenue from the market before substitutes products appear.After that is
accomplished,the producer can lower the pricedrastically to capturethe low-end buyers and to thwart the copycat
competitors. – (http://www.businessdictionary.com/definition/market-skimming-pricing.html)

3. price competitionwhichwill meanthatall the firms’profitsare drivendowntonothing aseveryonewill have to
lowertheirpricesinordertokeepup withcompetitors.
Thus the saferoptionforall competitorsistocooperate witheachother,whichwouldmeanthatthe profitwill get
dividedequallybetweeneveryone. If afirmcheatsthey will gainall the profitbutif theyget caughtthenthere will
be a resultof noprofittherebyshowingthatcooperatingisthe bestoption. However,asthe numberof firms
increase,the profitgainedfromcheatingdoesnotchange,and neitherdoesthe punishment.So withmore firms in
an industry,eachfirmisearninglessfromcooperatingasthere are more firmsto share the profitswith.Therefore
withmore firmsinthe industry,there ismore incentivetocheatand lessincentive tocollude,socooperationis
therefore hardtosustaininsuch competition. (Mike Shor(2001-2008) Game TheoryandBusinessStrategy:Factors
AffectingSustainabilityof Cooperation –Market Concentration
http://www2.owen.vanderbilt.edu/mike.shor/courses/game-theory/docs/lecture06/collusion.html)
Detectionof cheating
If the detectionof cheatingishardtorecognise,thensustainingcooperationwill be hardtoobtainas the incentive
to cheatis a lot higherasit iseasierto‘getaway’ withit. For cooperationtobe able tohappeneasily,the payoff
fromcheatingneedstobe lowenough.Forexample,inthe marketdescribedpreviously,afirm'spresentvalue of
profitsfromcheatingis:P+ 0/(1+r) + 0/(1+r)2
+ 0/(1+r)3
+ ...= P 9
. Accordingtothe Grim TriggerStrategy,aftera firm
commitsthe act of cheating,the firmisseentobe punishedforever.The GrimTriggerStrategyiswhere a player,in
the firstperiod,will begintocooperate andcontinue todoso thereafteruntil theiropponentmakesa single
defection.Aftersuchdefection,the playertherefore defectsforeverandthusGrim TriggerStrategyhas brought
aboutthe endof cooperationbetweenthe firms.
Despite this,if itishardto detectsuch cheatingandtakestwoperiodstodetectthe firm’sdefection,thenthe firm
can get awaywithcheatingfora periodandgo back to cooperation, givingthemapresentvalue of: P+ P/(1+r) +
0/(1+r)2
+ 0/(1+r)3
+ ... = P + P/(1+r) 10
. Here we see that intheory,it is muchmore likelyforthere to be a larger
incentive tocheatasthe firmisable to getaway withitand inturn claimingall the profitsfora periodbefore anyone
detectsit,as well asnotdrivingthe endprofitsdowntonothingwhichwaspreviouslyseenwhenafirmwasunable
to ‘getaway’withit. (Chapter5: Cartels(Collusion) StrategiesforMaintainingEffectiveCollusion - GrimTriggerPrice
Strategy www.uwlax.edu/faculty/knowles/eco303/CHAPTER%205r.doc)
Consumerlock-in
If there is lessconsumerlock-inforeachbusiness,thenitislikelythatcooperationbeingsustainedwillbe very
difficult.If there are lotsof consumerswhoare essentially‘locked-in’toa firm, inwhichtheyonlybuyfromthat
particularbusinessandwill notswitchtoalternatives(e.g.because of the familiarity orloyaltywith the brand),then
if a businesscheats byloweringtheirpriceslowerthantheircompetitors,theywillnotcapture the locked-in
consumers.Thistherebyleadstothe bigincentive of notcheatingasthere islittle togainfrom it especiallyas
loweringtheirpriceswill justbe givingadiscounttotheirownlocked-inconsumersfurtherincreasingthe
disincentive tocheatastheirprofitabilityisagainlowereddue tolow pricingandno/little change indemand.
By considering there tobe anindustrywhere most consumersare locked-intosome firm, andindustryinwhich
there isno lock-in(resultinginthe ideathatall the consumersgoto the firmofferingthe lowestprice), we findthat
incentivestocheatare differingforeachfirm. Withthe industrywithnoconsumerlock-in,we findthatcollusionto
be obtainedwill prove quitechallengingasbycheating,one firmwill be able tocapture the entire marketshare and
gainall the profitsinthatmarket.Thus inthisinstance,the incentivetocheatwill be quite large asthe rewardsare
quite significant.Onthe otherhand, withthe firmthathas manylocked-inconsumers,we findthatcheatingwill
have little benefitintermsof obtaininggreatermarketshare;there isjustbenefittoitsconsumers inthe
9 P = Profitr = interest. The mathematical equation shows after claimingprofits in thefirstperiod, the profits arethen driven to
zero becauseof the extreme pricecompetition
10In the example, they are ableto claimall theprofits plus go back to cooperatingin the next period.

4. circumstance due to reducedprices.Thusinthisinstance,there will be noincentive tocheatasthere is notbenefit
to them.
So before afirmdecidestocheat,theyshouldalwaysfirstanalyse theirmarket:if the firmsare notsymmetric, in
whichsome mayhave a betterproduct; more locked-inconsumers;lowercosts;etc.then the maximuminterestrate
to sustaincooperation andcollude will differforeachfirmas some will have betteradvantagesoverothers.Soin
orderto have cooperation andfor itto be sustained,the actual interestrate hasto be lowerthan everyfirm's
maximum,inordertoguarantee thatno firmhas incentive tocheat – meaningthatif the benefit of cheatingislower
than whattheywouldgetbycooperating,thenthere isnoincentive tocheat.(Mike Shor(2001-2008) Game Theory
and BusinessStrategy:FactorsAffectingSustainabilityof Cooperation –Consumerlock-in
http://www2.owen.vanderbilt.edu/mike.shor/courses/game-theory/docs/lecture06/collusion.html)
Tit-for-Tat
If we considerasymmetricindustrywithonlytwofirms (if more firmsare added,thenthe situationbecomesworse
and more complicated) andwhere there isamonopolyprofitof 50,whichisdividedbetween bothof the firmsif
theyworktogetheror isif one firmcheats,theythencapture the entire monopolyprofit. Eachof the two firmsuses
Tit-for-Tat11
.Thismeansthatif a firmcheats inone period,thenthe nextperiod,bothfirmswill earnzeroprofits.For
the firmto have no incentive tocheat,then thatthe interestof cheatinghastobe lessthan0. Yet for interesttobe
lessthanzero, the future wouldbe more appreciatedbyafirmthan the present. Inotherwords,to have a pound
the followingyear,afirmmust investmore thana poundinthe presentyear. The wayto go about thisisto eitherto
cheatand capture all of the profits thisyearand gainno profitsthe followingyear,ortosplitthe profitsbetween the
twofirmseveryyear.Withsuch choice,the firmislikelytotake all of the profitscausingtit-for-tittonotbe an
enoughof a dissuasiontocheatinthiscircumstance.(Mike Shor(2001-2008) Game TheoryandBusinessStrategy:
Factors AffectingSustainabilityof Cooperation - Tit-for-Tatmaynotbe enoughdeterrence
http://www2.owen.vanderbilt.edu/mike.shor/courses/game-theory/docs/lecture06/collusion.html)
Cournot competition
Thistype of competitionwill make itverydifficultforbusinessestocheat.Thiseconomicmodel isusedtodescribe
industrieswithstructuresthathave companiescompetingonthe amountthatis producedbyeachfirm, rather than
the price that is set.The model was ‘namedafternamedafterAntoine AugustinCournot12
(1801–1877) whowas
inspiredbyobservingcompetitioninaspringwaterduopoly’ (http://en.wikipedia.org/wiki/Cournot_competition,
October2008). The verystraightforward versionof the Cournotmodel ismore concernedwithduopolies: ‘amarket
withexactlytwo,more orlessequallypowerful, firms’(http://glossary.econguru.com/economic-term/duopoly,
2007). It is veryeasyto extendthisCournotmodelfurtherinordertoincorporate more competingfirms,e.g.making
it an oligopolymodel.
The oligopolymodel is basedontwoparticularassumptionsthatwithout,the modelcannotbe classifiedasa
Cournotmodel.These twoassumptionsare thatthe firmsinthe marketare all sellingthe same productswhere
there isessentiallynoproductdifferentiationbetweenthe products andthatthe decisiononthe amountto produce
by eachfirmis setat the same time aseach other.Assumingthese twothingsare consideredveryimportantforthe
fact that itimplies the marketwill indefinitelysettle onasingle price forall the outputthat isproducedbythe firms,
and thusthisprice will dependonthe collective outputof all the firmsfoundinthe market.Because of this,the only
decisiontomake foreach firminthe marketis the amount/quantitythateach isgoingproduce.All of the firmsare
to make theirdecisionssimultaneously,meaningthatintheory,nobusinesshasanadvantage overthe overs.No
11 Tit-for-tat strategies are based on the concepts of retaliation and altruism.When faced with a prisoner's dilemma -like
scenario,an individual will cooperatewhen the other member has an immediate history of cooperatingand will defaultwhen
the counterparty previously defaulted. This concept is often applied to economics and biology. -
(http://www.investopedia.com/terms/t/tit-for-tat.asp)
12 Antoine Augustin Cournot (28 August 1801 – 31 March 1877) was a French philosopher and mathematician.
(http://en.wikipedia.org/wiki/Antoine_Augustin_Cournot)

5. one intheoryshouldhave an advantage asall the firmshave tomake theirdecisionsbefore theyhave any
knowledge of the decisionsof theircompetitors.
The assumptionof all the firmsmakingtheirdecisions atthe exactsame time seemsratherunrealisticif taken
literally.Howeverif we take the ideathateachfirmsmakesa decisionsbeforetheyknow the decisionsof the other
firmsmakesthe ideabecome fairlyrealisticformanymarkets. Therefore becausethe aspectof notknowingwhat
theircompetitorsare deciding,itmakesitextremelydifficulttotryandcheat as there isinsufficientknowledgetodo
so.Thus Game Theoryisonlyusedinthismodel totry and helppredictwhatthe otherpeople willdeci detoproduce
basedon one’s ownreactionstothe competition. (MartinJ.Osborne (1997) Cournot'sduopolymodel)
Stackelbergduopoly
If we change the assumptionsof the Cournotmodel intermsof decisionmaking,we findourselveswith anewmodel
– the Stackelbergmodel whichwasnamedafterHeinrichFreiherrvonStackelberg13
.Inthismodel of aduopoly,one
firmisseenas the industryleaderinwhichtheyhave the powertomake all the decisions first,before itsrivals.
If we considertwofirms:firmA and firmB. The assumptionsinthe Cournotmodel are still relevant,yetinthiscase
the decisionmakingisdone sequentially.Thusif firmA makesthe decisionfirst,itisthennamedindustryleader,
whilstfirmBfollowsorreacts to firmA’sdecisions.Whilstmakingtheirdecision,firmA musttry to planand
understandhowfirmB will reacttotheirdecisioninordertotry and beattheircompetitoratthe game.
Movingsequentiallyisessential forfirmA totry and get ahead.Thisisbecause whenbothof the firmsmake their
decisionsatthe same time,firmB(the follower)doesn’tsee firmA’s(the leader) warningthatitwill produce alarge
quantityasa credible threatasfirmB couldhave done the exactsame whichwill cause lossesforbothof the firms
as theywouldbothbe over-producing;disallowingthemfrommaximisingprofits.Bymakingmovessimultaneously,
bothfirmsare unlikelytoriskproducingmassive amountsof products because of the riskof lossesinvolved.Thus
makingmovessequentiallyisessential forfirmA toget aheadof its competitorandplaythe game well,astheycan
try and predictthe reactionfromfirmB, plusare able to dictate the amounttheywantto produce whilstfirmA has
to produce the Stackelbergfolloweroutputlevel.
Therefore tostayaheadof competitors,itisbettertouse the Stackelbergcompetition ratherthanthe Cournot
competition.Howevertoplayitsafe,firmsshoulduse the Cournotcompetitioninordertotry gainsome sort of
cooperation,asnoone in effecthasan advantage overanyone else aseveryone hasthe same limitedknowledge as
each other.( SparkNotes:MONOPOLIES&OLIGOPOLIES - DuopoliesandOligopolies:Stackelbergduopoly
http://www.sparknotes.com/economics/micro/monopolies/section2.rhtml)
Bertrand Duopoly
In thismodel whichwas’developedinthe late nineteenthcenturybyFrencheconomistJosephBertrand14
’
(http://www.sparknotes.com/economics/micro/monopolies/section2.rhtml) the model changesisstrategicvariables
fromthe previousStackelbergandCournotmodels. Inthe Bertrandmodel, the firmdecidewhatprice theywill sell
theirproductsratherthan howmuch of itto produce.Similartothe Cournotmodel,the choicesmade bythe firms
are againmade simultaneously.Whilstmakingdecisionsatthe same time,the firmsalsohave identical cost
structuresas eachother.In thismodel however,the decisionsare restrictedtojustbeingmade inone stage of the
13 Heinrich Freiherr von Stackelberg (October 31, 1905 - October 12,1946) was a German economist who contributed to game
theory and industrial organization and is known for the Stackelberg leadership model.
(http://en.wikipedia.org/wiki/Heinrich_Freiherr_von_Stackelberg)
14 Joseph Louis François Bertrand (March 11,1822 – April 5, 1900,born and died in Paris) was a French mathematician who
worked in the fields of number theory, differential geometry, probability theory,economics and thermodynamics.
(http://en.wikipedia.org/wiki/Joseph_Louis_Fran%C3%A7ois_Bertrand)

6. game,meaningthatthe firmscan onlychoose the prices once. (BetrandDuopoly
academic.wsc.edu/faculty/chparke1/duopbertrand.ppt)
Althoughitwasmentionedthatthere was similarities betweenthe Bertrandmodelandthe Cournot model
excludingthe aspectof havingdifferentstrategicvariables,one wouldsuppose the resultswouldnotbe thatvarying.
Despite that,we findthatinour resultstheyare completelydifferent. The Betrandmodel finds itselfreducingtoa
competitiveprice strategyinwhichprofitsare foundtobe nothing – thiscan be seeninthe Grim Triggerstrategy
ideamentionedearlier;whereasthe Cournotmodel hasmore of a monopolisticoutcome.
Ratherthan usingequations,we caneasilysee thatthere couldbe nootheroutcome thanwhatwas stated.To show
that the Bertrandmodel outcome isan equilibrium15
we cantry to picture a marketwithtwofirms(A and B) thatare
identical toone anotherandsell asa market price denotedasP.16
The assumptionfoundin the Betrandargumentis
that the marketis beingsoldbyeachfirmwiththemeachhavinghalf the marketas well asthemsellingatan equal
price to one another.
If we considerthatfirmA raisesitsprice of the productsabove the marketprice of P, we wouldfindthatfirmA
wouldlose all of itsprofitsasits salesare all lostto firmB. Because of this,firmA wouldhave toexitthe market asit
wouldhave noprofitsto sustainitself inthe market.Oppositetothis,if firmA was to loweritsprice belowthatof
the marketprice P, itwouldendup operatingbelow costandtherefore be workingata lossoverall. Inthisidea,
withthe competitive outcome,firmA cannottryto increase itsprofitssuccessful bychangingitspriceseitherhigher
or lower.Withthislogic,firmBdoesnot have an incentive tochange itsoriginal prices. The outcome resultsinwhat
iscalled‘Nash equilibrium’17
. (http://www.cdam.lse.ac.uk/Reports/Files/cdam-2001-09.pdf (Game TheoryBernhard
vonStengel - LondonSchool of Economics,2008) RobertJ. Graham (2013) How to Compete forCustomers:The
BertrandModel of DuopoliesinManagerial Economic(Managerial EconomicsForDummies))
Unsurprisingly,therecanbe no equilibriumwhere profits are negativeasfirmswill be workingata loss.If we
considerthe same marketas describedpreviously,we willextendthisideaof equilibriumexistence.Againwe say
that if firmA were toraise its pricesabove Pthenwe say that all salesare lostto firmB. Howeverif itwere tolower
itspricesonlyslightlyinwhichitisstill above marginal costwe canassume that firmA wouldnow capture the whole
marketand inturn all of the profits.Yetthe problemisthatfirmB has the same incentivesasfirmA,so whatis
stoppingfirmBfrom doingthe same? What we expecttosee if firmA and B constantlytryingto lowertheirprices
lowerthanthe otherfirmto try and capture the entiretyof the market;theywoulddothisuntil profitsbecome
nothing– showingthatevenwhenprofitsare positive,there isstill noexistence of equilibriuminthismodel..To
conclude,we state the obviousfactthatcheatingwill achievenothinginthismodel,thuscooperationisbestfit.
(SparkNotes:MONOPOLIES& OLIGOPOLIES - DuopoliesandOligopolies:Bertrandduopoly
http://www.sparknotes.com/economics/micro/monopolies/section2.rhtml)
Prisoner’sdilemma- Recentreal life example
PrisonersDilemma18
isone of the basicsof understandingGame Theorybutwasfirstapplied(asthe name suggests)
to convictsof crime wantingto getthe bestresultintermsof jail time.Howeveritcan be appliedtoreal life
15 A condition in which all actinginfluences arecancelled by others, resultingin a stable,balanced,or unchangingsystem –
(http://www.thefreedictionary.com/equilibrium)
16 The denotation of P is the competitive priceat which neither firm earns profits.
17 A Nash equilibrium,named after John Nash,is a set of strategies,one for each player,such that no player has incentiveto
unilaterally changeher action.Players arein equilibriumif a change in strategies by any one of them would lead that player to
earn less than if she remained with her current strategy. -
(http://www.gametheory.net/dictionary/NashEquilibrium.html)
18 A paradox in decision analysisin which two individuals actingin their own best interest pursue a course of action that does n ot
resultin the ideal outcome. The typical prisoner's dilemma is setup in such a way that both parties chooseto protect
themselves atthe expense of the other participant.As a result of followinga purely logical thoughtprocess to help oneself, both
participantsfind themselves in a worse state than if they had cooperated with each other in the decision-makingprocess.–

7. situationssuchasthe panicfuel buyingcrisisin2012. The bestsolutiontothe panicfuel buyingisdependenton
whatsomeone else doesindependently.(MartinLewis(2012) Shouldyoupanicbuy fuel?A true prisoner’sdilemma)
‘The petrol buyer’sdilemma’cansee the followingresults:if youdon’tpanicbuyas well asmostothersnot panic
buying,thenfuel shortagesare unlikely.Inthe same circumstances,butwhereyoudidpanicbuythenyouwould
definitelybe sortedforthe future andthere wouldhave beenlittle effectonfuel shortages.Whereasif mostothers
didpanicbuy thenfuel isat a higherriskof runningoutand you are unlikely togetanyif youdid notpanic buywith
them,whereasif youdidyouwouldhave beenokaywithfuel forthe time being.Obviouslythe dilemmasare not
exactlythe same as eachother,but clearlythe psychologyissomewhatsimilar;youhave todependyour own
decisiononthe reactionsof everybodyelse
If there had beennoone whostartedthispanic buyingof fuel,thenobviouslythere wouldnothave beenaproblem,
but withingames,youcanneverpredicthowone mightreact.Inthis panic-buyingphase we see aproblemfor
businessesthattransportgoodsusingtheirownmeansof transportsuch as lorrycompanies.Theycaneitherpanic
buyto be safe,howeverthisraisescosts,andthese costsneedtobe coveredwhichcouldresultinhigherprices
whichcouldlose themdemandif otherbusinesseschose nottopanic-buysodidnot have toincrease pricesascosts
were notdrivenup.Howeverif fuel doeshappentorunout thenthe businessthatalreadyboughtthe fuel hasthe
advantage andwill winbackall the customersas the otherbusinessescannotgetthe goodstothe customers.The
problemwiththatlogichowever,isthatitisunlikelyforall the fuel torun out,evenif itdoes, itishard to predict
howlongit will take todo so.This isnot a methodone wantsto rely on.The bestway couldbe for all the businesses
to collectively panicbuytobe safe inthe future and noone will have a cost advantage overthe other.Yetif one
wantsto be ahead thencheatingmaybe the bestway forwardbutit couldbe seenas quite risky.
Conclusion
The questionof howto playcomeswithmuchcomplexityforthe ideathatforeach marketthere ismanydifferent
waysto play,thusthere isnot setrule or model toplay againstas the circumstancesare so varied.Aswe have seen
some modelsare obviouslybestsuitedtosituationsmore thanothersare andcheatingisnot alwaysthe bestwayto
winas it hasbeenshowntosometimesbe verydetrimentaltoall playersincludingoneself.Totryand winthe game,
the bestway to playisto make sure that one understandsthoroughlytheirsituationandunderstandsall of their
competitors.
One mustrealise thatplayingthe game isnot sosimple fortheymustanticipate othersreactionstoyourdecisions
for the decisionsmade are equallyasimportantas the reactionsmade.Aswe have seen,Game Theorydoesnotgive
a definite optionof winningthe ‘game’itjustgivessome indicationof whatcanhappen.Youcan nevertruly
understandhowa competitorwill reactbutyoucan guess. Bain& Company19
foundinstudiesthat 70% of all
strategicreorganisationsdonotimprove anything andsome actuallyworsenthe state of the business.(Max J.
Pucher(2010) Can Game TheoryImprove BusinessStrategy?)
(http://www.investopedia.com/terms/p/prisoners-dilemma.asp)
Example: Two men are arrested, but the policedo not possess enough information for a conviction.Followingtheseparation of
the two men, the policeoffer both a similar deal –if one testifies againsthis partner (defects/betrays),and the other remains
silent(co-operates/assists),the betrayer goes free and the co-operator receives the full one-year sentence. If both remain silent,
both aresentenced to only one month in jail for a minor charge.If each ‘rats out’ the other, each receives a three-month
sentence. Each prisoner must chooseeither to betray or remain silent;the decision of each is kept quiet.
(http://en.wikipedia.org/wiki/Prisoner's_dilemma)
19 An Americanglobal managementconsulting firmheadquarteredinBoston,Massachusetts.The firmprovides
advisoryservicestomanyof the world'slargestbusinesses,non-profitorganisations,andgovernments.
http://en.wikipedia.org/wiki/Bain_&_Company

8. To conclude, withthe informationfoundinthe studies, the randomchancesseemtoprove the mostsuccessful
strategiesinsteadof the previouslyarguedattemptof usingcomplex mathematical theories.Accordingtothe
Germanpsychologist Gigerenzer,the more important approachtosuch businessgamesisnottouse strategic
modelsbutratherto use one’sowninstinct;totake risksuch as entrepreneurslike RichardBransondid.Itisargued
that for a businesstobe improvedwithinthe game,thentheyneedtoturntheir attentiontomanagementby
empoweringpeoplewithspecialistskillsintermsof IT whichwill helptofulfil goalsquicklyandefficiently.Thus
Game Theoryisonlyuseful if one knowsaboutthe importance of the skillsneededbythe workforce tofulfil the
needsof the businessstrategyplan.