Game Theory Summary

Summary of Right Game: Use Game Theory to Shape Strategy
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.
II. The rules in business:

a. To every action, there is a reaction But does not have to be equal or opposite. b. You cannot take away more than you put in how do you know what each player brings to the table? Answer: you take that player out of the equation to see their added value. c. Must shift your perspective from egocentricity to all centrism. Meaning from focusing on your position to the position of other players (Ex) GM from lose-lose to win-win. Automobile industry notorious for pricing cutting at year-end to clear inventory. Rewards consumer behavior of waiting until year end to get these discounts so dealers would have to place these incentives in earlier during the year. All companies lost because of these price cuts. In Sept 1992 GM launched credit card with 5% of charges to future GM car lease or purchase. Consumers became loyal, did not wait until year end so GM could hold its regular price or have more room to increase, then Ford had more price flexibility as well to get higher prices. WIN-WIN Other companies such as Ford and Volkswagen copied the credit card idea but imitation is not always bad. It helped the industry as a whole keep their car prices up. d. Others do not have to lose in order for you to win. e. Game of business is all about value. Creating it and Capturing it. This is where the VALUE NET comes into play.
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.
III. The Traps of Strategy:

1. Realizing you can change the game is crucial. 2. Initiate lost does not only come at expense of others. Look for win-win, or winlose. 3. Belief that others cant. All actions can be imitated. Imitation can be healthy. 4. Failure to see how picture. Use the Value Net 5. Failure to think methodically to change the game. 6. No end to the game of changing the game.

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Summary of Right Game: Use Game Theory to Shape Strategy

II. The rules in business:

III. The Traps of Strategy:

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