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STRATEGIC MANAGEMENT ASSIGNMENT

GAME THEORY

SUBMITTED BY: Mrunal Panchal (1311) Shail Shah (1320) Manthan Mayavanshi (1336) Neel Patel (1340)

making use of available information to devise the best plan to achieve one's objectives. In short. SEQUENTIAL GAMES To analyze a sequential game. Game theory simply extends this concept to interdependent decisions. and we conclude with a few words about some advanced game theory concepts. or otherwise most desirable result). and assume the next player would choose his/her best outcome. The sections below present techniques for analyzing sequential and simultaneous games. first construct a game tree mapping out all of the possibilities. 3. the players must alternate moves. the deciding player will choose his/her optimal outcome (the highest payoff. choices. in simultaneous games. . In sequential games. These types are distinguished because they require different analytical approaches. in all walks of life. But these techniques apply to more than just sport. Situations involving interdependent decisions arise frequently. A few examples in which game theory could come in handy include: • • • • Commuters deciding how to go to work Businesses competing in a market Diplomats negotiating a treaty Gamblers betting in a card game All of these situations call for strategic thinking . Look ahead to the very last decision. Back up to the second-to-last decision. and are not even limited to competitive situations. There are two fundamental types of games: sequential and simultaneous. game theory deals with any problem in which each players strategy depends on what the other players do. treating the following decision as fixed (because we have already decided what that player will pick if it should come to that). in which the options being evaluated are functions of the players.GAME THEORY INTRODUCTION TO GAME THEORY Game theory is the branch of decision theory concerned with interdependent decisions. the players can act at the same time. each of whom has individual objectives related to a common system or shared resources. the problems are called games and the participants are called players. and assume that if it comes to that point. Perhaps you are already familiar with assessing costs and benefits in order to make informed decisions between several options. The problems of interest involve multiple participants. Then follow the basic strategic rule: LOOK AHEAD AND REASON BACK 1. Continue reasoning back in this way until all decisions have been fixed. 2. Because game theory arose from the analysis of competitive scenarios.

so both end up worse off. because there is not necessarily any last move. you simply make the choices you identified at each of your decisions. First. but very famous example. Consider a simple. there are only two choices: either the player with the last decision gets his/her best outcome. they could cooperate and agree to hold out so they would both get lighter sentences. regardless of the choices of other players. Once it has been determined. But without the possibility of communication. or the game is not played. no other strategy would result in a higher payoff. The only time you even have to think is if another player makes a mistake. USE IT. SIMULTANEOUS GAMES Turning to simultaneous games. They are each told the following: • • • If you both confess. A dominant strategy has payoffs such that. both players have dominant strategies. we will have made our best possible decision. and are doing the same analysis. Sequential games are determined. A final observation here is that if both prisoners use their optimal strategies (confess). It is called the solution to the game. Second. the game tree obviates the need to actually play out the game. since there is at least one other strategy that will never be worse. Thus. and could be better (depending on the choices of other players). If you actually play out the game after conducting your analysis. we see the value of communication. he gets only 1 year and the other gets 25 years. Then you must look ahead and reason back again. notice that looking ahead and reasoning back determines not just one players optimal strategy. called the Prisoner's Dilemma: two suspected felons are caught by the police. as no one can possibly do better than the solution dictates. If neither of you confesses. with payoffs no better than those of at least one other strategy. For it to be incorrect. Notice that this procedure assumes that the other players are as smart as we are. you will each go to jail for 10 years.That's all there is to it. it is the only safe assumption. neither can risk it. If only one of you confesses. While this may not be the case. This greatly simplifies decisions: IF YOU HAVE A DOMINANT STRATEGY. and interrogated in separate rooms. an opponent must choose an option not in his/her own best interests. so ultimately. they do not reach an optimal outcome. it is irrelevant whether or not the game is actually played. Alternatively.* That is why the concept of winning does not really apply. This also simplifies decisions: DOMINATED STRATEGIES SHOULD NEVER BE USED. as we had already determined. If it is correct. If the two prisoners could only communicate. Consequently. you each get 3 years in jail. There are several notable features in this game. one could argue that the player who gets to make the last decision wins. First of all. . but those for all players. regardless of the choices of other players. Thus. it is immediately apparent that they must be handled differently. to see if your optimal strategy has changed. both players also have dominated strategies. This is an important theme: maximizing individual welfare does not necessarily aggregate to optimal welfare for a group. To end this section with a few observations before moving on to simultaneous games. both prisoners should confess. because there is no way to do better.

need to put themselves in the position of the competitor or competitors. Arguably. In the case of Mckinsey & Co. T-Mobile. that the competitor is in an interdependent relationship with other competitors. as game theorists.TO BE DIFFERNT OR THE SAME? Game theory is concerned with the inter-relationships between the competitive moves of a set of competitors. Comcast. Second. and for most of the Silicon Valley. one competitor's move will galvanise response from another competitor. . There are two key principles to guide the development of successful strategies of competition that flow from these assumptions: • • Strategists. Third that to a greater or lesser extent competitors are aware of the interdependencies that exist and of the sorts of move that competitors could take. this is especially so within strategic groups where competitors are following similar strategies or have similar characteristics or where competitors are targeting the same market segments. Yahoo. to avoid such problem we can change the rules of the game on the bases of differentiation like Shorter life cycle undermining competitors' strongholds countering the competitors' deep pocket So. Google and Microsoft have over the years developed a competitive ecosystem using technology. If there is then the priority is to take the necessary steps to eliminate that strategy. First. and the outcome of choices made by one competitor is dependent on the choices made by another. Google. but the study of game theory based on them has become very complex and elaborate. The central idea is that the strategist has to anticipate the reaction of competitors. view about what that competitor is likely to do and choose their best course of action in this light. Example of game theory in corporate world Apple. in short to maintain the profitability the differentiation must be moderate not to high or not to low. consultant Philipp Natterman had considered profitability & differentiation in terms of pricing & product features it follows the Sequential move game as the time passes the industry differentiation falls and the profitability of both mobile and computer also falls. Verizon. These principles seem simple enough. HP. There are three core assumptions in this. telephone and traditional media partners such as AOL. Time Warner. the relationship between Apple and Google has worsened only in the past couple of years as they each have entered into the smartphones category. So all competitors are affected by what other competitors do. To do this it is important to identify if there is any strategy that could be followed by a competitor that would lead to the strategist's own organisation being dominated in the market. rational. and others for both defensive and offensive combat against each other. They can then take an informed. that a competitor will behave rationally and always try to win to their own benefit. While Microsoft has been a common enemy for both Apple. AT&T.

its limiting of choice for customers. Google was always suspicious of Microsoft’s dominance. it doesn’t need to reduce prices and compromise on margins. Google and Microsoft use some form of Game Theory techniques to figure out what the other maybe working on in the future. Google founders made certain that Microsoft didn’t catch a wind of what they were working on. but once Google started developing the Android. Apple has historically focused on its hardware and Mac OS. So. Old Media companies have tried to collaborate and cooperate even with Microsoft to defend their advertising and other distribution models from the Google onslaught. Instead they fight in each product category and attack the other’s profit center. So it bought Quattro Wireless in 2009 and launched iAd in 2010. They each have products in the appropriate profit-centers of the others. and that it had to develop its own browser-based operating system (Chrome). Differentiate between One-Time and Repeated Interactions: Since all of these 3 companies. and respond by launching appropriate counter-products. . but then as it started developing its iTunes. iPhones and other platforms. they started having conflicts with Apple with Eric Schmidt resigning from Apple Board. Apple’s main business is robust hardware and OS. and its destroying of Netscape browser. according to Game Theory. Google and Apple collaborated on the search related technologies and distribution through Mac platform. Unify Minds to Promote Cooperation: Google has used this tool effectively to recruit bright engineers with a promise of promoting cloud computing and other open-source technologies to break down barriers these engineers believe proprietary systems create. Everything else it does are offensive and defensive strategies to protect its turf. they should be cooperating and focusing on their own core competencies.Microsoft for the longest time dismissed the need for search-based ad dollars and just focused on selling software and operating systems. Only when Google went public and disclosed how much money it was making through search ads. Google was feeling that Mac OS was limiting its choices. even as it was getting launched at Stanford. Primary moves the three companies have made using Game Theory: Use Strategic Foresight (backward induction): Apple. Microsoft’s main focus is its ubiquitous operating system and Office software. Know Yourself as Well as Others: Google knows that its core is search and all the acquisitions it has done strengthen this core by adding to its data gold mine. and since its customers are die-hard Apple fans. their partners and vendors know and expect what the others are likely to do. and are unwilling to concede any territory as if in a chess match. did Microsoft start making overtures to Yahoo for a possible collaboration and combining its MSN portal with Yahoo’s. it realized through working with Google that all these media provided Apple with a great mechanism to generate ad dollars.