Application Of Game Theory In Strategic Formulation Marketing Essay

This particular article talks about the use of game theory in the business world. In the current highly competitive market it is becoming harder and more difficult to choose about the prices strategies and budgeting of the adverts. This article points out the concept of game strategy with various illustrations.

Keywords: strategy, pay offs, prisoner's dilemma.

Introduction

Game theory, a branch of applied mathematics that is used in the social sciences, especially in economics, biology, executive, political knowledge, international relationships, computer technology, and philosophy efforts to mathematically take behavior in tactical situations or game titles, in which a person's success to make choices will depend on the choices of others. While at first developed to investigate competitions where one individual will better at another's expenditure (zero sum game titles), it's been expanded to treat a wide class of interactions, which are classified according to many criteria. Today game theory is trusted available for solving situations where there are a number of players.

Companies are employing the knowledge of Game Theory to help them make complicated strategic decisions in this highly competitive market with least possible risk. Background of Modern Game Theory is more than 50 years old and has proven an ability to generate the ideal strategic choice in a number of different situations, companies and sectors. Rules of game theory are applied through the use of strategy game titles.

Game theory and its own applications:

A powerful tool for predicting outcomes of several interacting firms where an action of a single firm directly impacts the payoff of other engaging players.

Enables a company to formulate their best strategy.

Ideal for strategic situations where competitive or individual behaviors can be modeled.

For example

Auctions (covered job bids),

Bargaining activities (union - management negotiations),

Product decisions (admittance or exit market segments),

Principal-agent decisions (payment negotiations, supplier incentives) and

Supply chain design (capacity management, build vs. out source decisions).

Multiple strategy video games are analyses to model different competitors, various payoffs and potential strategies. The aim of these games is to deliver

A recommended group of strategic decisions to guide competitive patterns to an appealing outcome, and;

An research of what sort of group of possible strategic goes can anticipate various competitive final results.

Various types of video games can be utilized and analysed predicated on the proper situation, the number of players, the quantity of information available and the timing constraints.

Classification of game theory:

There are basically three types of games

Fully co- operative game: to clarify this game we may take the exemplory case of two cyclists approaching towards one another. it is in their finest interest to prevent the collision and If indeed they have to enough time collision all of them has three strategies

move right

move left

maintain direction

The strategy followed by one person in cases like this depends on your partner. As they both don't want a collision they'll change their path predicated on the opponent's strategy. This sort of game is called full co operative game.

Zero - sum non co operative game: to describe this case we can take the exemplory case of the retail outlets in one locality. Most of them use different prices strategy to attract customer. in this case if store can get customers it is on the accounts of the other shop. In this specific case a strategy accompanied by one player affects the other player always. In simple words the win of one person comes on the accounts of other person's damage.

Mixed strategy game: this kind of game clarifies the situation where in fact the interests of both player are interdependent. But they are partly opposed and partly coincident. This sort of strategy is followed mostly in the case of union - management feuds. Regarding union and the management their benefits are interrelated. At the same time they may have conflicting passions as well.

Other classification: game theory has been divided into following categories

Static game titles: this essentially handles anticipating rivals' move. These types of games involve charges strategy, prisoners problem, the idea of dominant strategy, renovating of advertising campaign budget etc.

Dynamic game titles: handles the idea of perfect and sub perfect game titles.

Prisoner's issue:

Below given diagram depicts the prisoner problem.

Figure 3: Prisoner's dilemma

Prisoners' dilemma is a lovely idea of game theory that clarifies various issues that businesses face while taking the decision regarding fixing the price or on choosing the budget for the advertisement. The evidence available with authorities is not sufficient enough to convict these criminals to convict. Though these are likely to get twenty years of imprisonment if the crime is proved, they'll get only one yr of imprisonment if the crime is not turned out. if indeed they apply the best strategy they both can prevent the conviction. The strategies they can follow are

'A' confesses 'B' remains silent: A gets an imprisonment of 5 years and B gets an imprisonment of 20 years.

B confesses A remains silent: B gets an imprisonment of 5 years and A of twenty years.

Both of them confess: both get an imprisonment of 5 years.

Both stay silent: both get an imprisonment of 1 1 year.

The dilemma here's that they don't know about each other's strategy and they end up confessing the crime as both of them want to all the 20 yr of imprisonment. But if they know about the strategy of the challenger they can decide about their strategy and can get best equilibrium possible that is twelve months for both of these. The identical theory applies for most firms in the corporate world plus they conclude choosing the incorrect strategy as a result of opponent or the apprehensions in their brain.

The Concept of Dominant Strategy: Dominant strategy is the strategy accompanied by any player that will supersede all the strategies accompanied by the opponent.

Eliminating Dominant Strategy:

It will in the best of interests of both rivals to remove the dominant strategy. One beautiful example of this is the OPEC.

Nash Equilibrium: A Nash equilibrium is a mixture of strategies in a way that no specific player can deviate unilaterally from his or her to improve his pay offs.

Few examples of game theory in the useful corporate world:

Price wars: this is explained by the following example: imagine there are two pizza providers in the location and they have different prices insurance policies namely- high, low and medium. There are two restaurants in a small town, pizza hut and dominos.

They are in competition with each other for customers. They have three price slabs: high (H), medium (M) or low (L). The client bottom part is 1, 000 of which 300 only ever buy at Dominos and 300 only buy at Pizza hut. The other 400 are price-sensitive and always buy the cheaper pizza and choose at random if they bill the same price. Both providers make a margin of Ј12 per pizza if indeed they fee high prices, Ј10 per pizza if they charge medium prices, and Ј5 for low prices. Both Dominos and Pizza hut cannot guess what the other player has chosen before they choose themselves. We are able to calculate earnings by multiplying the amount of customers with the margin per customer. For example, if dominos charges a medium price and Pizza hut a high price, Dominos will sell to his 300 'loyal' customers and the 400 'price sensitive' customers at a margin of Ј10 each, presenting him pay-offs of Ј7, 000. Pizza hut only markets to his 300 dedicated customers, but at a margin of Ј12 per pizza, providing him profits of Ј3, 600.

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Figure 2: costing battle between two suppliers

P&gIn this circumstance three equilibrium develops one of 6/6, 5/5 other one of 2. 5/2. 5. the commendable picture for both the organizations is 6/6 but becausee of the purchase price wars between them none of them are able to extract

ad

No ad

Ad wars

No ad

$5m

colgate

$5, m

$5. 5m,

$2m

Ad

$2m

$5. 5m

$2. 5m

$2. 5m

Figure 3: advertising war between P & G and Colgate

This particular situation is of both brands of toothpastes in which both of them follow different advertising strategies. The decision of choosing an ad and not choosing an ad depends upon the opponent. They have got four possible strategies

Both of these go for ad

None of these go for ad

P& G applies to advertising but colgate does not go for ad

Colgate applies to advertising but P & G not.

In two cases the equilibrium is available one for 5, 5, and the other for 2. 5, 2. 5. the firms can earn more income without choosing any ad but as both the firms want to capture the non loyal market each goes for ads and finally wrap up by lower margins. The issue here's that if one firm will not go for the advertising and the other moves, then it will lose money. So guessing rivals move becomes very important here.

Assumptions:

Players and rational and they select strategies based on their interest.

The market is equally divided in the players.

Other factors are constant.

Shortcomings of Game Theory:

Game theory has many short comings as well and that should be considered.

Assumes the players are rational and they play in their self-interest. This might not be the case all the time.

Assumes players respond strategically and consider the competitive responses of their activities. But every administrator will not think inside a strategic context.

The idea of Game Theory is most effective when managers understand the expected outcomes of the strategies they are pursuing and the strategy that their competitors will observe.

To be little precise most of the companies often do not have enough understanding of their own payoffs let alone those of their competition.

Despite its shortcomings, an adequately designed game can perceptibly reduce business risk, can produce valuable competitive insights, improve inner position around decisions and boost strategic utility.

According to the "The Economist mag" "Managers have much to study from game theory provided they put it to use to clarify their thinking, not as an alternative for business experience. "

Conclusion:

Game theory is a lovely idea of applied mathematics. Though it has got shortcomings and its assumptions is probably not applicable in all the cases it can benefit firms and establishments in finding the correct strategies. Based on the pay offs, volume of players and other strategic situations game theory can be helpful in expanding the optimum strategies for the organizations.

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