Game Theory and Business Strategy

Game Trees in Business Strategy | Bargaining | References 

Why Game Theory Important to Business Today?

Game theory studies strategic situations where players choose different actions to maximize their returns. Economists have used game theory to analyze a wide array of economic phenomena, including bargaining, duopolies, auctions, and they have developed strategic thinking.

Strategic thinking is the art of outdoing an adversary, knowing that the adversary is tyring to do the same to you. Corporations and businessmen must use good competitive strategies to anticipate their rivals' resonses and to survive in competitions. For example, in the personal computer market, IBM is more known for its ability to bring standardized technology than for its innovation. Apple and other start-up companies enter the market with new ideas. Risky innovations are their best and only chance of gaining market share. There are two ways to move second. You can imitate as soon as the other has revealed his approach or wait longer until the success or failure of the approach is known. The longer wait is advantageous in business, because the competition is usually not zero-sum game. However, market leaders have more chance to get the merits of their early upstarts.

A similar story can be told about wage negotiation. A strike against Ford brings disadvantages when General Motors and Chrysler continues to operate. Therefore, Ford is more likely to settle on terms favorable to the Union. Such a strike is also less costly to the Union. However, the management and the Union often fail to reach an agreement as negotiations occur in complex ways at different rates in different situations. Therefore, it is not easy to predict the opponent's offer or counteroffer.

This website on game theory begins by analyzing the game theory approach to business strategy. It also navigates various games and strategies with illustrations and case studies.