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.
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