The Right Game: Use Game Theory to Shape Strategy
Midterm Paper
Submitted by: Zeinab Amin
Submitted to: Pan Zhang
Selected Topics - SMGT4470
Northern Alberta Institute of Technology
Feb 27, 2017 Table of Contents
EXECUTIVE SUMMARY 3
INTRODUCTION 4
TYPES OF GAMES 4
ANALYSIS 5
WIN-WIN 5
SHAPING THE GAME YOU PLAY 5
5 ELEMENTS 6
PLAYERS 6
ADDED VALUE 6
RULES 7
TACTICS 7
SCOPE 7
RELATED ARTICLES 7
Why Good Accountants Do Bad Audit 7
Corporate Short-Term Thinking and The Winner Take All Market 7
CONCLUSION 7
REFERENCES 9
EXECUTIVE SUMMARY
Over the past two decades, the Game Theory has changed the game of Business in so many ways, from how players interact to the outcome of the Game theory
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The game theory was created in 1944 when mathematical genius John von Neumann and the economist Oskar Morgenstern published their book Theory of games and economic behavior (Brandenburger & Nalebuff, 1995). Till this day, their work provides a systematic way to understand the behaviors of player in situations where their fortunes are interdependent (Brandenburger & Nalebuff, 1995). “Game theory is a sort of umbrella or ‘unified field’ theory for the rational side of social science, where ‘social’ is interpreted broadly, to include human as well as non-human players.” (Aumann, 1987).
TYPES OF GAMES
The pioneers of the game theory distinguished two types of games, the first is rule-based games and these types of games require players to follow rules and this promotes the, ‘for every action, there is a reaction’ principle. This theory, like chess, inspires individuals to think like their respective opponents and anticipate how such players will respond to their own moves. In addition, the second type is freewheeling games and these games require players to interact without restraints and this game promotes the principle (Brandenburger & Nalebuff, 1995), that you cannot take away from the game, more that you have invested in it.
Interactions in the game theory either have the vertical dimension, which are the company’s customers and suppliers.
In real life, the theory cannot provide a straightforward strategy used by the competitor or to be used against the competitor because it is not clear what strategy the competitor has chosen (Li & Yu,2016).
We always regard “GAMES” as “pastimes”, but in reality the functions of games are more than that.
Games can be very hard. States can be only observes to a certain extend. Multiple agents choose Actions, stochastic pays off and state transition depends on state and other
In this paper, the efficiency of the ultimatum game theory was assessed to resolve water conflicts between agricultural and environmental water needs in Zarrinehroud River Basin, northwest of Iran. Irrigated agriculture and its water needs were to be adjusted in order to mitigate the downstream Lake Urmia drying condition. The great need of food production in the region and in the whole country in one hand, and the worsening environmental impacts due to the drying lake, on the other hand, are clearly conflicting issues.
The simulation started off with the exact same product for each group--a hologram. From there, groups were able to achieve success or failure and determine the consequences of each action. Although there were many business advisors and “experts” offering advice in the game, it was ultimately up to the group to decide how to divide the money each quarter. This is the concept business management, when the CEO decides on new idea or concept to create a more profitable company. Each company had to have quick reactions to fluctuations in the market in order to stay profitable and not be consumed by the other groups. The oligopoly setting, an industry with a small number of large firms in control of the market, put lots of emphasis on market share and price. One group, Torque Team, was able to seize control of the entire market from the very beginning using a strategy of predatory pricing and created a monopoly within this small group of firms. Predatory pricing or undercutting is a strategy in business where a company drops
The optimal strategy for player one to pursue would be to defect under any circumstance. If player one were to cooperate, that minimum and maximum return would be one and three respectively. Whereas if player one were to defect the minimum points he or she would earn is two, and the maximum could potentially be four.
Game theory cannot always predict reliable outcomes for real-life situations as it is more an
like our sports world today and may explain why some individuals view organizational decision making as a game of war. In a business scenario, zero sum may be seen as a war between two competitors. In the food service industry, competition is fierce. In order to corner the market, zero sum is encouraged by upper management to gain control of more group purchasing organizations. Although some organizations have adopted a more favorable decision making style called win-win.
I first was interested in game theory after having learned about the topic in economics during my junior year. I fell in love with economics and game theory was a major aspect of microeconomics. Furthermore, the notion that a company could decide what course of action to take based simply off of a chart astounded me. It caused me to truly wonder how such actions could occur and how game theory truly worked. It simply begged the question, what was the underlying basis of game theory and how did a company choose the most probable option that would increase their profits.
Game Theory states that most anything and everything can be thought of as a game. People can use it to strategize on voting, deciding on what articles or coupons to release, or even deciding whether or not, it is in your best interest to rat out someone else if both parties are being questioned by the police. There are many companies that use this in order to decide how they are going to operate. The book Thinking Strategically: The Competitive Edge in Business, Politics, and Everyday Life by Dixit and Nalebuff discusses how businesses can alter their way of thinking to find their dominant strategy. Companies can pair up to create oligopolies, one set of companies that do this is beer companies, and each of these must consider their dominant strategy, their incentives, outside factors, and with all of these things carefully considered, a company is able to become successful.
In this game tree, the two player’s state of minds and actions are displayed. Consider the case scenario of Boeing and General Electric (GE) playing a sequential game, GE makes the first move in the process followed by Boeing based on their interpretation of GE’s
by Jon Von Neumann, although that development involved a number of many scholars who thought collectively way back in the 1950s (Hart, 2015). The model has further been taken global with such figures like Jean Tirole, who received global attention for the Nobel Memorial Prize award in 2011. The baseline theory, and game theory are applicable in business contexts as it did for Glasberg et al (2014) research case study. For the problem statement given above, game theory stands high applicable chances based on the idea that any business has to weigh the risks involved before considering a particular strategy (Blonski & Spagnolo, 2015). Cloud computing is part of the technologies seen important in the contemporary business context. This, however, is accompanied by many risks and any organization has to determine such risks, and identify who loses and who gains in the undertaken risk.
The game of strategy is about being different and staying different. How is this achieved? Formulating a business model need not be as complicated as predicting the future market and the actions of competitors. However, as Magretta mentions, strategic thinking is necessarily an
Further support of this equilibrium position comes from the single period game-theoretic model in which it is common knowledge that both firms have complete information and that both firms are rational. A distinct feature of a Cournot equilibrium-termed the Cournot-Nash equilibrium, is where each firm maximises its profit given its expectation of the output choice of the other firm. To argue that the Cournot equilibrium holds both firms would expect its rival to produce at the equilibrium and thus the firms are rational.
First let us discuss the basics of game theory itself. Game theory is defined as “the study of mathematical models of conflict and cooperation between intelligent, rational decision-makers”. (Myerson, 1991) Also called ‘strategic decision making’ game theory is essentially studying the decisions that people will make in interactive situations with given inputs and outputs. Game theory is based on the principles that players will act logically and that players are looking out for their own interests; basically it assumes that players are trying to maximize their personal gain by using strategy. Game theory helps us better understand human decision making by focusing on the rational aspects of decision science.