Exercise 1: Win-Win, Win-Lose, or
Lose-Lose?
A key aspect of company strategy concerns the interactions
between two or more firms. When a new market segment
emerges, should a firm strive for a first-mover advantage, or wait
to see how the market takes shape? Diversified firms compete
against one another in multiple market segments and must often
consider how actions in one market might be subject to retaliation
by a competitor in another segment. Similarly, when a competitor
initiates a price war, a firm must decide whether it should
respond in kind.
Game theory is helpful for understanding the strategic interaction
between firms. Game theory uses assumptions about the
behavior of rivals to help a company choose a specific strategy
that maximizes its return. In this exercise, you will use game
theory to help analyze business decisions.
Individual
One of the classic illustrations of game theory can be found in
the prisoner’s dilemma. Two criminals have been apprehended
by the police for suspicion of a robbery. The police separate the
thieves and offer them the same deal: Inform on your peer and
receive a lesser sentence. Let your peer inform on you and receive
a harsher sentence. What should you tell the police?
Visit http://www.gametheory.net where you can play the prisoner’s
dilemma against a computer. Play the dilemma using different
parameters, and make notes of your experience.
Groups
Many examples of game theory can be found in popular culture,
from the reality show Survivor to episodes of The Simpsons. Revisit
http://www.gametheory.net and select either a TV or movie illustration.
Discuss the applications of game theory with your team.