Strate­gic in­ter­ac­tion

> Mak­ing Game The­ory work for man­agers

The Sun (Malaysia) - - SUNBIZ -

IN­CREAS­INGLY, cor­po­rate man­agers have to tackle more dif­fi­cult busi­ness sit­u­a­tions. Es­tab­lished busi­nesses are in­ten­tion­ally tar­geted by star­tups us­ing dis­rup­tive tech­nolo­gies and novel busi­ness mod­els to up­set the in­dus­trial or­der and trig­ger shifts in de­mand, in­dus­trial ca­pac­ity, and mar­ket prices. And the knee­jerk re­ac­tion of man­agers is to take the ra­tional ap­proach: to an­tic­i­pate a range of out­comes based on prob­a­ble de­ci­sions by key stake­hold­ers and to col­late the ad­van­tages and dis­ad­van­tages of each op­tion. But, myr­iad is­sues sug­gest there is no sin­gle and pre­cise an­swer to any prob­lem. In this ar­ti­cle, we dis­cuss why Game The­ory (GT) may pro­vide an in­formed sup­port to any de­ci­sion by man­agers.

Orig­i­nally, GT ad­dressed ze­ro­sum games, in which one per­son’s gains re­sult in losses for the other par­tic­i­pants. Later, GT be­came the study of math­e­mat­i­cal mod­els of con­flict and co­op­er­a­tion be­tween in­tel­li­gent ra­tional de­ci­sion­mak­ers. The the­ory did not re­ally ex­ist as a unique field un­til the pa­per by John von Neumann in 1928. In 1944, he co-wrote The­ory of Games and Economic Be­hav­ior with Oskar Mor­gen­stern. Since then, GT has been widely ap­plied. Ap­pli­ca­tions in­clude a wide ar­ray of economic phe­nom­ena and ap­proaches, such as auc­tions, bar­gain­ing, merg­ers and ac­qui­si­tions, pric­ing, fair di­vi­sion, duopolies, oli­gop­ol­ies, so­cial net­work for­ma­tion, and across such broad ar­eas as po­lit­i­cal econ­omy, ex­per­i­men­tal eco­nomics, and in­dus­trial or­gan­i­sa­tion.

In busi­ness set­tings, GT has been ap­plied ra­tio­nally to de­rive pre­dic­tions of be­hav­iour for all play­ers. It does so by seek­ing some form of equi­lib­rium, or bal­ance, based on a spe­cific set of as­sump­tions. Then it tries to pre­dict the most likely sce­nario. A game of GT must spec­ify the fol­low­ing el­e­ments: the play­ers of the game, the in­for­ma­tion and ac­tions avail­able to each player at each de­ci­sion point, and the pay­offs for each out­come. A game the­o­rist typ­i­cally uses th­ese el­e­ments, along with a solution con­cept of their choos­ing, to de­duce a set of equi­lib­rium strate­gies for each player such that, when th­ese strate­gies are em­ployed, no player can profit by uni­lat­er­ally de­vi­at­ing from his strat­egy. For in­stance, in economic en­vi­ron­ment of oli­gop­oly, when con­trol over the sup­ply of a com­mod­ity is in the hands of a small num­ber of pro­duc­ers, the ac­tions to be taken by play­ers would af­fect the key met­rics such as rev­enues, prices, and ex­penses. Th­ese equi­lib­rium strate­gies de­ter­mine an equi­lib­rium to the game – a sta­ble state in which ei­ther one out­come oc­curs or a set of out­comes oc­cur with known prob­a­bil­ity. So, there will be a se­ries of “snap­shots”. For ex­am­ple, a lo­cal re­tailer faces a new player plan­ning to open its own store in the same neigh­bour­hood. Depend­ing on as­sump­tions (e.g. value propo­si­tions, chan­nels, cost struc­tures, cus­tomer de­mand), sev­eral sce­nar­ios and strate­gies may be drawn. The prob­a­ble sce­nar­ios in­clude: the re­tailer to cut prices to re­tain the mar­ket share; “wait-and-see” the ac­tions of the new­comer and then se­cure the great­est value by re­act­ing prop­erly.

How­ever, the bone of con­tention of GT is the as­sump­tion that all play­ers will act ra­tio­nally. In re­al­ity, hu­man na­ture is com­pet­i­tive. An ad­di­tional sce­nario to the ear­lier ex­am­ple is to al­low the new­comer to ex­ist in a par­tic­u­lar niche where the lo­cal re­tailer is weak­est. For in­stance, the new­comer is an e-com­merce and the in­cum­bent is brick-and-mor­tar. Due to com­pet­i­tive na­ture of busi­ness, the in­cum­bent re­tailer will likely shift its best strat­egy from co­ex­is­tence to coun­ter­at­tack when the mar­ket is in­creas­ingly favour­ing the e-com­merce chan­nel.

Nev­er­the­less, GT pro­vides the cor­po­rate de­ci­sion mak­ers with in­formed sup­port for a wide range of be­havioural re­la­tions: to de­cide whether to mar­ket a prod­uct

VUMBA pro­gramme head Dr Hendry Ng.

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