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Game Theory

Game Theory

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Published by: Shankey on Apr 23, 2011
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12/06/2012

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ICFAI UNIVERSITY DEHRADUN
 
Name : Gopal KrishanSection : DSemester : IIICourse Code: SLGM611Course Title: Business Strategy ISubmitted on: 6
th
September, 2010Submitted to: Surjyabrat BuragohainAssignment title: Business strategiesexplained through game theory, real businessscenario examles.
 
Game theory: Explaining business strategies
Game theory is applicable to all the conditions where decision making is applicable. Inbusiness scenarios there are a number of occasions where game theory can be applied anddecisions can be made. If one fails to do so one may face difficulties later due to the decisionmade. Game theory assumes that the player is a rational thinker, which is actually the natureof human being. Here are some caselets which explains the real life examples of businessimplications of game theory.
1.
 
Why did cigarette companies agree to abandon advertising?
History of cigarette advertising: Prior to 1970, there was huge amount of money spent oncigarette advertisements by the companies especially the four giants in cigarettemanufacturing of that time i.e. Philip Morris, American Blend, Tareyton and Liggett &Myers. People could frequently see cigarette commercial being broadcasted on the televisionand radio. But in 1970, Congress passed the Public Health Cigarette Smoking Act accordingto which advertising was banned for tobacco companies. But the question is why did cigarettecompanies agree to abandon advertising? The answer lies in game theory.
The condition before the act was passed was like a prisoner’s dilemma for cigarette
companies. Cigarette smokers were not being attracted much because of advertisements.Commercials were helping the cigarette companies to just retain their market share. And forthat they had to spend million of dollars every year on advertising. At the same time, if acompany will stop advertising, other company will take away its market share becausepossibility of customers switching from one brand to other was very high. In such a situation,
if company stops to advertise it’
ll lose its market share.The above bewilderment can be depicted by the diagram below:If Phillip Morris and Liggett & Myers both advertise, they will have to spend a huge amountand at the same time the addition to their market share would be very less. Thus they wouldactually be losing being in the top left quadrant. However, if only their company advertises
and the other company doesn’t they will get a major portion of the market share and the other company’s share will drop. But this condition will not occur in such a compet
itive market.Phillip MorrisAdvertise No Advertise
   L   i  g  g  e   t   t   &   M  y  e  r  s   A   d  v  e  r   t   i  s  e   N  o   A   d  v  e  r   t   i  s  e
 
1150/1150 500/18001800/500 1500/1500
 
Thus top right quadrant and bottom left quadrant are also not the solution part. Being in thebottom right quadrant would be beneficial for both the companies but they would be reluctantto enter the bottom right quadrant first, the reason be
ing what if the other company doesn’t
play the same strategy. Thus advertising becomes the dominant strategy for both thecompanies. The hierarchy of strategy in terms of benefit to the company would thus become:1.
 
No advertisement2.
 
Only your company advertise3.
 
Both advertise4.
 
Only other company advertiseObserving this, all the government did was to remove the first three quadrants from thematrix by putting a ban on advertising. This is actually the situation where the companieswanted to be all the time but could not do it. Thus, when the act was passed, the companiesagreed to the same and stopped advertisement without showing any unwillingness. Now allthe companies could stop pondering over the massive advertising budgets and increase theirprofits. This game is a win-win situation for both the government as well as the cigarettecompanies.
2.
 
Why was revenue generated from 3G spectrum sales for Indiangovernment was three times to that of expected?
In the recently happened 3G spectrum sales in India almost all the telecommunication giantsparticipated and bet for spectrums. But the most interesting part was that the government wasexpecting a total revenue generation of Rs. 67,710 crores which is in multiples of whatactually the government expected would be the revenue generations from the auction.A telecom company while placing a bid for a spectrum would be in confusion as to whatshould be the price it should bid.
If he bids very high he would land up having the winner’s
curse of paying more than what the next winner to him is paying for the similar spectrum. Atthe same time if he bids low he would lose the auction. This is how we get the matrix below:Let us assume that there are only two participants in the auction, one being Bharati Airtel andother one being Vodafone. The both have to bid for the spectrum without knowing what otherVodafoneLow Bid Hih Bid
   B   h  a  r  a   t   i   A   i  r   t  e   l   L  o  w   B   i   d   H   i   h   B   i   d
 
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