The Right Game: Use Game Theory to Shape Strategy

This article is about utilizing game theory in a business setting. Game theory is a guide to making strategic decisions when the fortunes of several intelligent players are interdependent. Decision making in these situations is based on the reactions you expect from the other players in the game. The crux of game theory is allocentrism – the importance of focusing on others. Another important take-away is that greater profits can often be found by changing the game, rather than maintaining the status quo. The creators of game theory distinguished two types of games: rule-based, and freewheeling. In rule-based games, players must act according to certain rules, such as contracts. In these games you should play out every player’s reactions as far ahead as possible before making a decision in order to get a better idea of the ultimate outcome. In freewheeling games, there are no rules to constrain players, and the focus is on what value every player adds to the game. Changing the game can lead to better outcomes. For example, when two companies are competing against each other, one popular strategy is to lower your price so that you become more attractive than your competitor. This is problematic because your competitor will likely be forced to match your price change and the ultimate effect will be the same level of attractiveness as before, except now everyone is selling the product at a lower price. This is called “destructive competition.” One way to change the game and avoid this destructive competition is to look for win-win scenarios. Too often, companies focus on destroying the competition, when there might be an option available that makes financial sense for all players in the game (such as in the GM credit card example). These win-win scenarios are advantageous because: there is greater