How to Use Game Theory to Your Advantage in Business

by Andrew McGuinness     Sep 03, 2019

Investopedia defines game theory as “the process of modelling the strategic interaction between two or more players in a situation containing set rules and outcomes.” It has been used to the benefit of several fields of study including mathematics, psychology, and philosophy. While it has won eight Nobel prizes, how exactly is it useful in the field of business? More specifically, is there a way to use game theory to one’s advantage when it comes to business? Let’s discuss below.

1. An example of game theory in business

The most common example of game theory usage in the world of business is within an oligopoly. Within this market structure, companies settle on a common price agreed upon by a majority of businesses rather than having the choice to offer a lower price that will make a price more competitive. It is usually in the interest of all members of a group to collaborate and synchronize movements rather than compete. However, once one company decides to stray from the herd and take advantage of the competitive opportunities that are available, all other companies are left either suffering losses or following in these competitive footsteps.

2. Benefits of game theory

Decision analysis forms a part of game theory and allows those operating or forming part of a business to detect the moves of others as well as make the most well-rounded decisions for their own well-being.

Game theory can be used in countless fields of business. It can be useful to consider with auction tactics, marketing campaign strategies, and voting styles. In order to take into account all parties and factors involved in making a decision, applying game theory is ideal.

3. Nash Equilibrium

In a Nash equilibrium, no particular benefits will be gained from drastic changes in strategy. It is something that should be considered when trying to make a decision during a stable point in the market. This is a time when you and your competitors are considered to be on equal grounds, and neither of you are found to be leaning toward a change that will risk your current stability. A Nash equilibrium assumes that the situation wherein you and your competitors are in is one that is non-cooperative.

As mentioned, a Nash equilibrium focuses on non-cooperative competition. It takes into account the ways in which your competitors may go against you, enabling you to assess the worst-case scenarios. In other words, a Nash equilibrium allows you not only to prepare for the worst, but to use this to your advantage as well.

A well-known instance of Nash equilibrium is found within the prisoner’s dilemma. This dilemma involves decision making without being able to cooperate or being aware of the thought process of your competitor. For this reason, you are forced to make your own assumptions and predictions and act on them accordingly.

Conclusion

Game theory has been used in countless fields and has now been found to be particularly useful in the field of business. In order to form a successful business and give it the opportunity to thrive on the market, there are countless factors that need to be taken into consideration. Among these, the most essential are other businesses that serve as your competition. Game theory allows you to take movements and possible thoughts and decisions of your competition, and use them to your advantage by counteracting them or collaborating with them. In other words, game theory provides businesses with more stable foundations for business owners to make decisions.





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