Game Theory: An examination of Starbucks

Starbucks Corporation is an American multinational coffee company and cafe chain with over 20, 000 stores across the world, the majority of which are situated in the United States, so that it is the major coffeehouse on the planet. Starbuck's name is encouraged by the type of the first mate in the Herman Melville's all-time classic book Moby Dick. The objective of the business is to 'to inspire and nurture the human being spirit - one individual, one cup and one area at a time'. (1) Starbuck cafes around the world sell hot and frigid drinks such as coffees along with other food items such as pastries, goodies and Starbucks products such as mugs and tumblers. Lots of the company's products are custom to the positioning of the store and the entertainment division of the company handles marketing of books, music and videos. Ever since the company was founded in 1971, it's been growing swiftly in sales and revenues. The fact that the business has opened typically two stores each day since 1987 is a glowing beacon of the success of the company. (2)

Starbucks first ventured into the UK when it attained 65 caffeine stores of the Seattle Coffee Company in May of 1998. (3) Today, the business serves millions of customers every day with a existence in over 50 countries throughout the world. Coffee is bought by the business's coffee buyers in person travelling to the Latin America, Africa and Asia to seek out the very best quality of coffees available and done products are produced though Starbuck's signature Roast enriching the flavour and balance of the caffeine. The business's first general population offering is at the 26th of July 1996 and it has been stated on the NASDAQ ever since.

Here in this statement, we investigate the utilization of games theory and simulation to judge and test the use of strategic management at Starbucks. The article also seeks to critically examine game theory and the appropriateness of the same in the analysis of options for strategic change/transformation.


Game theory in simple terms is the way in which a group of brilliant individuals interact and affiliate with one another to attain their own goals. A casino game can be described as activities that folks perform for either materials gain or pleasure and game theory can be explained as the study and analysis of the proper interaction between your individuals involved in the game. A game typically includes three elements: the players of the game, the strategies applied by the players and the results of the decisions made by each one of the players. Game theory is the analysis and examination of challenging situation and using the overall game situations to aid in the decision making process.

A strategy can be described as being strictly dominant, if the ball player ends up making a higher payoff than any other related strategy whatever the other players do. In essence, the strategy that provides a player the best payoff is named a strictly prominent strategy. Several simple game titles can be solved by using this strategy. While using this strategy, the gamer analyses and compares the different strategies to decide which one of which gives the better payoff. A technique is said to be purely dominated, if there always exists another strategy that provides an improved or same payoff compared to any other technique for a new player.

While strictly prominent strategies are powerful tools you can use to change the stream of the overall game in the player's favour, isolating the strategies and applying them to particular situations is rather difficult because of the large amounts of information which may be present. In order to identify the dominated strategies, one must be focused on the players payoff's at this time and mentally block out the irrelevant payoffs and strategies and isolate the relevant ones. A method to do this is to execute continuous elimination purely dominated strategies. Once a strategy has been determined as purely dominated, this is a rational idea not to make use of it since there's always a strategy much better than it. By iterating this process, one may have the ability to isolate the totally prominent strategy.

Game theory can be of great help in solving true to life situations through the translation of the situations to games models and making use of game theory in it. A number of the games which may be applicable in real life situations are the following.

Prisoner's Dilemma

Prisoner's Issue is a traditional example of a casino game in game theory strategy which shows why two entities, be it organizations or individuals do not cooperate with each other even through doing so will bring both of these major benefits. The formal classification of the game as identified by Albert W. Tucker is really as follows

"Two members of your criminal gang are arrested and imprisoned. Each prisoner is within solitary confinement with no means of speaking to or exchanging communications with the other. The authorities admit they don't have enough facts to convict the match on the principal charge. They intend to sentence both to a year in prison on a smaller charge. Simultaneously, the authorities offer each prisoner a Faustian deal. If he testifies against his partner, he will go free while the partner are certain to get 3 years in prison on the main charge. Oh, yes, there's a get. . . If both prisoners testify against each other; both will be sentenced to two years in jail. (4)"

The game is utilized to demonstrate the way the distrust and completion of the individual parties towards one another may bring about the worst possible option being forced upon each of them. This specific game can be applied to a number of commercial organizations such as ASDA and other chain supermarkets where are there are frequent price wars or some other sorts of competition. Another relevant example is that of extreme animosity between countries such as Indian and Pakistan, leading to an Arms Competition, draining both of the countries' resources and causing currency instabilities.

Sequential Game

A sequential game is a casino game in game theory where a player chooses his strategies sequentially. With this form, a new player has home elevators the strategy that the other player has chosen before he does make his move. Thus, the sequential video games have a period axis and are decided and damaged by the other player's goes. This evidently implies that the player to make the first move has the power to impact the steps of the other players in the future since each player determines on the strategies they supply at the palm and the actions of the first player therefore influence their steps.

A classic exemplory case of a genuine life true sequential game is that of chess, where each player calls for turns in producing their strategies in line with the moves made by that of his opponent. These game titles can be easily represented by payoff matrices and can be resolved through backward induction. Another exemplory case of one common sequential game in program to real life is auctioning where each one of the participants raise their public sale amount based on the previous participant's decision.

Simultaneous Game

Simultaneous video games are played out when each player makes his decisions without knowing the decisions or activities of the other players. Essentially, simultaneous game titles contrast the sequential games atlanta divorce attorneys sense of the term. For example, simultaneous games do not have a time collection and the activities of the players are not damaged by that of each other.

An exemplory case of a true simultaneous game is rock newspaper scissors with each of the players taking decisions independent of each other. Normal Forms will be the chosen types of representations for simultaneous video games. Bidding is another classing example of a genuine life simultaneous game where in fact the participants decided their investments irrespective of the actual other may have chosen.

Ultimatum Game

In game theory, ultimatum game is played out between two players who have been given a particular amount of money to be divided included in this. Through the game, the first player makes a proposal how to divide the cash and the next player can reply by wither receiving or rejecting the proposal. If the next player chose to admit the proposal, each one of the players receives a amount of cash as suggested by the first player. However, if he does not acknowledge, neither player gets anything. This game originated in the year 1982 by G˜th, Schmittberger, and Schwarze and is often used in economic tests.

Dictator Game

The dictator game, as the name suggested is dominated by dictator and all of those other players are merely silent partners. It really is similar to the ultimatum game in a few senses; however, the role of the players other than the dictator is completely passive. Inside the dictator game, the main player, i. e. the dictator proposes the department of some endowment for example, a resource like the market show or cash reward. The rest of the players, the respondents, have no choice other than to simply accept the department and make do with whatever resources are still left remaining by the dictator. Unlike the Ultimatum game, here the role of the respondent is totally passive.

Hotelling Game

Hotelling game in game theory is a form of competition where two rivalling companies choose the positioning with their business or the costs with their goods according compared to that of the competitor. The game is dependant on the observation that by complementing the positioning or the price of the competition, each player slices into the market share of these competitors and also increases independently shares and revenues.


Starbucks loved an unprecedented progress in its early years growing from a minor local store found in Seattle with an internationally massive of coffeehouses across the world due to lots of well-organized and managed professional decisions. However, in the modern times, their progress has slowed down and the business was compelled to close down around 300 stores because the year 2008. This may be due to the splitting of the market show by the rising competition such as McDonalds, who've introduced McCafes as their foray into the coffee business. The two companies have been doing rather well in the past couple of years by using different strategies. In the next sections we try to investigate and explore how the several games and game ideas are applicable with respect to the competition of these companies and verify how Starbucks rose to vitality.

Application of Hotelling Laws/Linear City Model

The rapid development of Starbucks can be attributed to the application of the strategies of the Linear City Model or Hotelling Legislation. When Starbucks inserted the local marketplaces with a local competitor, as depicted below. Considering the market is uniquely distributed, the rival is positioned in the middle, allowing them to harness maximum profits. Thus convenience is the competitor's only benefits and with the better the Starbucks retail shop, assessed by x, is to the competitor, more market talk about it can gain.

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With the positioning and convenience being the only factors of matter, if the company opens a shop just. 1 miles away from the competitor, it will gain 47. 5% of the customers. However, apart from the convenience the brand armed with the Starbucks experience' and brand name, attracts more customers using its coffee being appealing to the consumer approximately around $1 a cup. Representing the Starbucks experience cost as transportation cost t, and the coffees respected at $3 and $2. 5 at Starbucks and the local competitor respectively, the customer valuing a sit down elsewhere well worth $4, he evaluates his buying decision the following

Customer Power Starbucks: WTP - (PS) = $4. 0 - ($3. 0) = $1. 0

Customer Utility RESTAURANT: WTP - (Computer + [1-x] t) = $4. 0 - ($2. 5 + [1-. 1]*$1. 0) = $0. 6

Through this example, one can demonstrate the way the 'Starbucks experience has allowed the business to dominate the local marketplaces by capturing over 70% of the market share. Without clear competition, the business could effectively expand at will and take out the local caffeine houses. Also the business tried out to centralize itself at the neighborhood customer bases to increase the income. In this example, a new rival intending to open a new store would have to open up the store to either area of store and so would gain only not even half the market share.

Now, considering the situation where a Starbucks store located is situated about 50 % a mile away from the centre of the client platform ie x=. 5. Now, considering all the factors the same as above, the customer evaluation would be

Customer Utility Starbucks: WTP - (P + x1t)" $4. 0 - ($3 +. 5*$1. 0) = $. 50

This means that a fresh store can take over the market share so long as their location is less than that of Starbucks. This is one of why there is a phenomenon where in fact the Starbucks stores clustered towards each other. By increasing the strategic location of their stores, the company was able to maximize their revenue. In this example, your best option available for a new store is to find to the centre of the micro-market at x=0, splitting the marketplace.

However with the Starbucks stores clustering towards each other with the word now known as 'Starbucks in every corner', the problem is a significant deterrent to the internet marketers from beginning new stores. The company in its clustering divided its profits among the stores with the prevailing ones closing down and moving away, preserving the Nash Equilibrium and playing their best reactions.

Sequential game at Starbucks with respect to McDonalds Coffee shop proposal

While the company loved a monopoly in the espresso business for a long period, the getting into of McDonalds into the coffee industry influenced the company's income significantly. The espresso market in america was valued at around $1 billion by the company and the price tag on future sales was predicted to around $100, 000 per store. This example can be defined in game theory as follows.

Game: McDonalds' access decision in 2007

Actions: McDonalds' - admittance v. no access, Starbucks - accommodate v. combat (drop prices)

Payoffs: earnings are limited by the maximum part of Starbucks revenues susceptible to attack

i. e. price very sensitive and non-loyal customers.

Look Forth Reason Back again: McDonald's enters, Starbucks responds

Adjusting the 80/20 guideline to 80/25, the faithful customers of the company are approximated at around $4. 85 billion. While let's assume that the spending practices of all of those other customers as the same, only around $1. 2 billion of the sales would result from the non-core. While using records showing that around 37% of caffeine drinkers being non-loyal customers, the company stands to reduce around 10% of these revenues if the non-loyal consumers turned offer to the McCafes. Considering this over an interval of 5 years, the payoff to the business for accommodation would be to lose around $1, 944 million in income.

However, if the corporation chose to deal with the fast food chain by reducing their prices to an average of 2. 25 per sit down elsewhere from $3. 50 and assuming that the average transfer costs around $3, it could a significant amount of profits from the prevailing customers by around 24% per year. Projecting this to a five year period, and considering that the market talk about of the company is fixed, the business stands to reduce around $4, 801 millions

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Clearly, from these figures, the best option for the company, if McDonalds determines to enter into the espresso industry, is to accommodate the newcomer, since opposing it would cost the company much more if it decides to fight by cutting the costs of its products. Thus, in the event where McDonald's gets into the market, the strictly prominent strategy of the company is to work at accommodating the new competitor.

Look Forward Reason Back again: McDonald's will not enter into, Starbucks responds

However, if McDonald's defers from coming into the market, the business would maintain steadily its status, holding on to its non-loyal customers and no loss of income would occur. Therefore that so long as McDonald's chooses never to enter the marketplace, the company will keep its customer bottom part, and the payoff would be zero. Another option is good for the company to lessen its process in case there is a threat to the client base, and then the payoff using the above mentioned calculations would be $4. 8 billion. Thus the prominent strategy that the company may take is to do nothing and support McDonald's on its accessibility to the market if the business chooses to take action since the cutting down of the costs is not worth the competition and loss of customers in accordance with nov revenues.

Look Front Reason Back: McDonalds' decision

Considering that your best option for Starbucks is to support McDonald's, the decision to lead to McDonald's is to choose if indeed they could make enough revenues available. In 2007, corresponding to a affirmation by McDonald's, it is convinced which it can generate up to $1billion in twelve-monthly sales with a $100, 000 investment into espresso equipment & training. Let's assume that the market will not grow, extrapolating the info to five years, the payoff to McDonald's will be a minimum of $200 million. As this data does not include the non-loyal customer platform of Starbucks, this is actually the worst case situation for McDonald's.

As the problem is only profitable to the business, McDonald's has chosen to open over 14, 000 locations in the US, aiming to lower into the Starbucks customer base.


While Starbucks and McDonalds have had the opportunity to coexist in the industry, McDonald's has been slowly but surely cutting in to the Starbucks market show. For Starbucks to survive, they will need to battle these strategies. Simply hoping to hold to the high grade market will prove to be a futile attempt to retain talk about, as McDonalds and more have means to access the channel. While Starbucks is wanting to diversify income by diving deeper in to the grocery store retail market, they will still need to purchase efforts never to only maintain existing customers, but be able to attract value customers without compromising profitability.

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