GAME THEORY

GAME THEORY
• Game theory is a theoretical framework for conceiving of social situations among competing players. In
some respects, game theory is the science of strategy, or at least the optimal decision-making of
independent and competing actors in a strategic setting. The key pioneers of game theory were
mathematicians John von Neumann and John Nash, as well as economist Oskar Morgenstern.
• Strategic setting
• Use of game to solve problem
• Game: any set of circumstances that has a result dependent on the actions of two or more decision-
makers (players)
• Players: a strategic decision-maker within the context of the game
• Strategy: a complete plan of action a player will take given the set of circumstances that might arise
within the game
• Payoff: the payout a player receives from arriving at a particular outcome (The payout can be in any
quantifiable form, from dollars to utility.)
• Information set: the information available at a given point in the game (The term information set is
most usually applied when the game has a sequential component.)
• Equilibrium: the point in a game where both players have made their decisions and an outcome is
reached
NASH EQUILIBRIUM

• The Nash Equilibrium

• Nash Equilibrium is an outcome reached that, once achieved, means no player can increase
payoff by changing decisions unilaterally. It can also be thought of as "no regrets," in the sense
that once a decision is made, the player will have no regrets concerning decisions considering
the consequences.
• The Nash Equilibrium is reached over time, in most cases. However, once the Nash Equilibrium
is reached, it will not be deviated from. After we learn how to find the Nash Equilibrium, take a
look at how a unilateral move would affect the situation. Does it make any sense? It shouldn't,
and that's why the Nash Equilibrium is described as "no regrets." Generally, there can be more
than one equilibrium in a game.
LIMITATIONS OF GT

• The biggest issue with game theory is that, like most other economic models, it relies on the
assumption that people are rational actors that are self-interested and utility-maximizing. Of
course, we are social beings who do cooperate and do care about the welfare of others, often
at our own expense. Game theory cannot account for the fact that in some situations we may
fall into a Nash equilibrium, and other times not, depending on the social context and who the
players are.
PRISONERS DILEMMA

• To determine if you need a new pricing strategy, you need to identify what pricing strategy you
are currently using.
• Often, pricing is seen as the marketing and salesdepartment’s role. But as the financial
leader’srole morphs into a value adding position, you must work with every department
(including marketing/sales) to be able to squeeze profits from every corner of the business.
PRISONERS DILEMMA - ADVANTAGES

• Respond quicker to competition

• Delight customers who are price sensitive
• Lay the foundations of dynamic pricing
• Combine with other strategies
• Avoid revenue loss from a race-to-the-bottom
PRISONERS DILEMMA -
DISADVANTAGES
• May get you distracted from other business tasks
• It doesn’t work in all markets
• Could be difficult for smaller retailers
• Combine with other strategies

TAKE AWAYS
Like with most e-commerce strategies, there are advantages and disadvantages.
Competitive pricing is no different.
You should now have a clearer idea of both the advantages and the disadvantages of
implementing competitive pricing to your e-commerce store.
Take careful consideration to your business model and your current pricing whether this
could be a viable option for your business!
 CO-OPETITION
• Co-opetition is a neologism representing the ambivalence of competition and cooperation in
business relationships.
• Co-opetition recognizes that business relationships have more than one aspect
• Co-opetition is part competition and part cooperation. It describes the fact that in today’s
business environment, most companies can achieve more success in a dynamic industry than they
ever could working alone.
• Specifically, when companies work together, they can create a much larger and more valuable
market than they ever could by working individually.
• Companies then compete with each other to determine who gets the largest share of that
market. Co-opetition allows for the real-world business situation that there can be multiple
winners in the marketplace. Business, unlike war, is not a winner takes all proposition.
• The objective is to maximize your return on investment – regardless of how well or how poorly
other people or other companies perform.
 VALUE NET FRAMEWORK
• The Value Net Framework, also known as Coopetition Framework is an analytical strategy tool.
• combining strategy and game theory, in order to describe and analyze the behavior of multiple players
within a given industry or market.The Value Net Framework is an alternative to Porter’s Five Forces
framework, extends the five forces framework more general by examining the role of complementors.
• The frameworks fundamental idea is that cooperation and competition coexist. Cooperation and
competition are both necessary and desirable when doing business. Cooperation is required to increase
benefits to all players (focus on market growth), and competition is needed to divide the existing
benefits among these players.
• The Value Net Framework is a schematic map designed to represent all the players in the game and the
inter-dependencies among them. Interactions take place along two dimensions. Along the vertical
dimension are the company’s customers and suppliers.The vertical dimension (suppliers-company-
customers) is the basic source of value (or economic surplus) creation. Along the horizontal dimension
are the players with whom the company interacts but does not transact. They are its competitors and
complementors. Competitors reduce the company’s added value along the vertical axis and
complementors increase your added value along the vertical axis.
COMPONENTS OF VALUE NET
FRAMEWORK
• Any company (or industry) operates in an environment having four main groups that influence
the course of any business. These four groups are:
• Customers buy your company’s products and services, in exchange for money.
• Suppliers provide resources to your company, in exchange for getting paid.
• Competitors offer substitutes (direct or indirect) to your company’s products and services.
Note that your company’s competitors compete both on the customer side (offering similar
products and services) and on the supplier side (buying similar resources).
• Complementors provide products or services that allow a customer to get more value out
of your products or services if they buy both. Again, there is a similar dynamic at work on the
supplier side.
COMPONENTS OF VALUE NET
FRAMEWORK
• The Value Net Framework describes the various roles of the players. It is possible for the same
player to occupy more than one role simultaneously. Designing the Value Net for business is the
first step toward changing the game.
• According to game theory, the game has five elements: players, added values, rules, tactics, and
scope.To change the game of business, you have to alter one or more of this five elements.
• Players
• Added Value
• Rules
• Tactics
• Scope
• https://www.mbaknol.com/strategic-management/value-net-framework/
 CORE COMPETENCE
• The core competency theory is the theory of strategy that prescribes actions to be taken by firms to achieve
competitive advantage in the marketplace. The concept of core competency states that firms must play to their
strengths or those areas or functions in which they have competencies. In addition, the theory also defines what
forms a core competency and this is to do with it being not easy for competitors to imitate, it can be reused across
the markets that the firm caters to and the products it makes, and it must add value to the end user or the
consumers who get benefit from it. In other words, companies must orient their strategies to tap into the
core competencies and the core competency is the fundamental basis for the value added by the firm.
• Core Competencies and Strategy
• The term core competency was coined by the leading management experts, CK Prahalad and Gary Hamel in an
article in the famous Harvard Business Review. By providing a basis for firms to compete and achieve sustainable
competitive advantage, Prahalad and Hamel pioneered the concept and laid the foundation for companies to follow in
practice.
• Some core competencies that firms might have include technical superiority, its customer relationship management,
and processes that are vastly efficient. In other words, each firm has a specific area in which it does well relative to its
competitors, this area of excellence can be reused by the firm in other markets and products, and finally, the area of
strength adds value to the consumer. The implications for real world practice are that core competencies must be
nurtured and the business model built around them instead of focusing too much on areas where the firm does not
have competency. This is not to say that other competencies must be neglected or ignored. Rather, the idea behind the
concept is that firms must leverage upon their core strengths and play to their advantages.
CORE COMPETENCE

• It is hard to replicate
• Valuable to users of product
• Applicable to multiple products
What is BOS?
01 Create uncontested
market space

02 Make the competition

irrelevant

03 Create and capture new

demand

04 Break the value cost trade

off
 BLUE OCEAN
• Blue ocean strategy is the simultaneous pursuit of differentiation and low cost to open up a new
market space and create new demand. It is about creating and capturing uncontested market space,
thereby making the competition irrelevant. It is based on the view that market boundaries and
industry structure are not a given and can be reconstructed by the actions and beliefs of industry
players.
• Red oceans are all the industries in existence today – the known market space. In red oceans,
industry boundaries are defined and accepted, and the competitive rules of the game are known.
• Here, companies try to outperform their rivals to grab a greater share of existing demand. As the
market space gets crowded, profits and growth are reduced. Products become commodities, leading
to cutthroat or ‘bloody’ competition. Hence the term red oceans.
• Blue oceans, in contrast, denote all the industries not in existence today – the unknown market
space, untainted by competition. In blue oceans, demand is created rather than fought over. There is
ample opportunity for growth that is both profitable and rapid.
• In blue oceans, competition is irrelevant because the rules of the game are waiting to be set. A blue
ocean is an analogy to describe the wider, deeper potential to be found in unexplored market space.
A blue ocean is vast, deep, and powerful in terms of profitable growth.
• Check diff and diagram in note book