Game Theory Summary
Game Theory Summary
Game Theory Summary
I. In 1944, math genius John von Neumann and economist Oskar Morgenstern
published their book Theory of Games and Economic Behavior. Neumann stated that there are two types of games: 1. Rule-based games players interact according to specified rules of engagement. 2. Free-wheeling games players interact without external constraints. Business is a mixer of both. Essence of business is to make sure you are playing the right game.
The steps are as follows: 1st Step: Identify the players in your value net and the interdependencies among them. On the vertical dimension: players company does interact but not transact withsubstitutors: alternative players from who consumers can buy same product from and complementors: players that consumers can buy complementary products from or suppliers can sell complementary resources. On the horizontal dimension: Consumers or buyers and Suppliers.
2nd Step: Identify all the elements of the game: there are five in the game theory: a) PLAYERS: As we identified in the Value Net . These players are not fixed. Sometimes it is smart to change the players, even yourself. (Ex) HSC (supplier) enters NutraSweet market because second supplier of Aspartame was needed in the cola market for Coke and Pepsi. Pay me to Play. BellSouth: understood that even if you dont get money the old fashion way you can get paid to change it. 3DO, gave license for others to build hardware so that it can concentrate on the complementary software. b) ADDED VALUES: There are ways to make yourself a more valuable player: to raise your added value or decrease the value of others. (Ex) TWA more leg room for in their planes. Overall, added customer value and decreased the number of seats available to sell in the airline industry. Nintendo decreased supplier and other player values by controlling the supply amount, so that Nintendo can have more negotiation leverage. Minnetoka softsoap dispenser gambled and controlled pump supply to slow down the competition. Used head start to create brand name loyalty. c) RULES: Gives the game structure, rules might arise from law, custom, practicality or contracts. Rules can be revised, new ones established or used to your advantage. (Ex) Judo economics newcomers into market limit their capacities so that the incumbents (older, more establish) market does not retaliate by matching newcomers lower prices. Kiwi International Air Lines limit itself to 4 routes per day,
Delta leaves it alone. For commodities such as gas, the meet-the competition clause (MCC) very worth following to keep competitors from coming in with lower pricing to win business. If not followed, both will lose because of price war. d)TACTICS: Are moves used to shape the way players perceive the game and how they play. Tactics can reduce misperception or maintain/create uncertainty. The fog can be lifted or cast. (Ex) New York Post cut their newspaper price to 25 cents to prove that the New York Times added value was not worth the price difference because People switched, so Times increase their to 50 cents, which is what the Post wanted the rates to be in the industry proved their point by unveiling added value of NY Times. e)SCOPE: Boundaries of game. Can expand or shrink scope of players, industry. What should it include? (Ex) Nintendo did not try to compete against Sagas 16-bit games but decided to stick with its 8-bit games.