Game Theory

Game theory is a theory of human behaviour. There are 3 posed "games" in this theory.

Game Theory

The first game is when there are 2 people who never meet. The first person is given a fictional amount of money (ie- £10) and is given the choice to keep all the money, give away all the money, or split it however they choose. How will the recipient react depending on how the money is split. If they are given £3, are they grateful for the £3 that they have gained, or do they see the dealer as selfish for keeping £7?

Ultimatum

This game is similar to the original game theory. The addition to this game is that the recipient can choose to reject or accept the offer. If they perceive the 7:3 split as unfair, they may reject it. In that way no one gets any money. Logically they would accept it as they gain £3 but many would reject it in revenge for the dealer's selfishness.

Prisoner Dilemma

The Prisoner Dilemma is based on the idea of two prisoners in custody. At present they each get one year. If one talks and rats out the other for a greater suspected crime, they get no prison time and the other gets 3 years. However if they both rat out the other they both get 2 years. So by game theory, what move is best to reduce prison time? Well the best move is to rat out the other because if they don't talk, you get no time. If they talk you both get 2 years which is higher than your current 1 year, but if your partner talks and you don't, you get the most time, with 3 years!

Game theory is in so many day-to-day situations. Using game theory you can look at all the options and work out how you achieve your goals, which is best for you, in what way you can "win". The best long term action is for people to be co-operative to gain money or points etc, until the "dealer" is unfair or taking advantage. In this case, you retaliate and immediately forgive, so as to be co-operative and work together to gain more, but showing that you will not be a push-over.

So how is this useful to business and marketing? Well there are so many ways but here we will cover negotiating, new products, and pricing.

Negotiating

One way in which Game Theory relates to business is negotiating. Whether it be negotiating wages, or buying supplies. But applying Game Theory can allow you to assess the best choices and options for you to get the best deal. However, a secondary lesson to be taken from Game Theory is that going against what is expected to be more generous during the start, or first negotiation can cause the other party to view you in a more positive light throughout later negotiations.

New Products

Game Theory is key when launching a new product. It can be used to help determine when is the best time to launch. This can get a little complicated so at the end, I have linked a couple of articles who explain Game Theory in this scenario, in more detail. But, the basis here is that if there are two companies who are ready to launch new (similar) products, when do they do it? If a product is launched too early, the market will not be ready and the product will fail. This will also leave the competitor to get knowledge and information form customer feedback, and improve their product before launch into the now ready market. However, if the company launches too late and their competitor has launched first, they will miss out on much of the market. So, the game of who launches first ensues.

Pricing

Businesses must create an optimal pricing strategy to maximise profit and attract customers away from competitors. To do so, they can apply game theory. A company's strategy is all based on current market players. If all competitors have priced their product highly, to maximise profits, the business should price low, so as to attract all of the customers and gain most of the profits over competitors. However, in a highly competitive market, it is likely that the competition is priced low, so as to stop competition from monopolising all potential customers. In this case, the business must follow suits, so as to not price themselves out of the market. Although profits would be higher for all businesses, if they all shared market share at a high price, game theory shows that in order to stop others from taking the advantage, all must price low and share the lower profits.

This has been a quick explanation of some places in which game theory can be applied to both business and marketing practices. Come back next week for a new blog.

-- From Marketing to Mind --

Photo by GR Stocks and Amanda Jones and Robert Coelho on Unsplash

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