Competitions, conflicts, and cooperation is part of every human being’s day to day activities. You are always thinking of the next move or what to say to get what you want. Politicians and business leaders make decisions that could affect their future positively or negatively. Use game theory effectively to get better outcomes in such situations.
Game theory models an interactive session with rational decision makers. The game focuses on situations where one participant benefits from the strategy used by the other participant. This theory can be applied to psychology, biology, economics, politics, and war. This article will show you how to use game theory in making business decisions.
- The Prisoner’s dilemma
This dilemma is a typical example of game theory. Picture a scenario where two people have been arrested as suspects of carjacking. The judge has no hard evidence to sentence them, so the prosecutor separates the two suspects to get them to confess. They are not in a position to communicate due to the separation. A deal is made to each suspect, and it results in three possible outcomes. In the first outcome, both fail to confess and receive a one year sentence. In the second scenario, one prisoner confesses, and the other one remains silent. In this scenario, the prosecutor will release the confessor and convict the other culprit for nineteen years. The last outcome sees both confess and receive a six-year sentence each. The best choice in this situation is where both criminals remain silent and receive a one year sentence. However, due to self-interest, it’s highly likely that both suspects will confess and get a six-year sentence.
The prisoner’s dilemma models various aspects of your life. For instance, a manager can use this model to show his employees how cooperation in the office will benefit everyone in the organization. You can promote collaboration by giving credit where it’s due and sharing knowledge within the company. Don’t take credit for work you haven’t done or accuse others of things they haven’t done. Such behavior will lead to the worst possible outcomes.
Another example where this dilemma can be applied is in competitive pricing. Two big competitors in the online bookkeeping services industry may be faced with the dilemma to drop or maintain their prices. If they both cooperate, they can agree to maintain their prices as they are. If one drops their prices and the other company doesn’t, they will increase demand and increase sales. However, if both drop their prices, no one will be at an advantage. They will reduce their profit margin. Maintaining the prices as they are is the best decision in this case.
- Hotelling’s game
This scenario vouchers for products from competing companies to have similar features. This case uses the principle of minimum differentiation. For example, consider two ice-cream vendors with mobile stands in a park. The park-goers would buy from the vendor that’s closest to them. If both vendors began selling from different locations, they would increase their market share by moving towards the populated area. The best outcome for both sellers is when they are located in the middle of the park. They would get an equal share of the market. Selling from the same place would reduce geographical differentiation.
Consider selling products with different features that meet most customer preferences. For instance, you may sell sports shoes with different designs and colors that cut across the various customer preferences. Selling products with aspects that anyone would like will increase your customer base.
Apply game theory to your daily interactions with people. It provides a simple model that you can use to get the best results in business. Keep in mind that you can either choose to cooperate or pursue your interests and disregard the other players. However, you will get better results if you decide to collaborate.
by: Mark Palmer