Game Theory is often used by managers and economists in the Business Field. While commonly used to analyze the economic playing field to predict the next moves that companies will make, Game Theory can also be used to make business decisions or to monitor different aspects of the competitive market. Some common strategies and ideas regarding game theory in Businesses are The Prisoner's Dilemma, Nash's Equilibrium, Hotelling Laws, and Zero-some/positive sum games.
Prisoner's Dilemma is a concept in game theory in which individuals have a set of choices that can determine the outcome for everyone. If an individual acts in their own self-interest, this will make the outcome worse for everyone involved. However, if individuals decide to work together and cooperate, this decision will lead to a better collective outcome for all parties.
As highlighted in the website's Overview section, Nash equilibrium describes a scenario in a competitive game where every player's strategy is optimized based on the strategies of others. In this state, no player is incentivized to change their approach, as doing so would not lead to a better outcome.
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Hotelling's Theory is very prevalent in businesses when it comes to Game Theory. This is the idea that firms try to place themselves in an area where they would maximize their profits, leading them to place themselves in areas that would attract more customers. This results in many companies placing themselves close to each other.
Zero-Sum Game: This is a competitive game in game theory with fewer winners than overall competition. The idea is that one person's win is another person's loss.
Positive-Sum Game: This is similar to a Zero-Sum Game, except in a non-competitive manner. Players decide to cooperate, resulting in an overall benefit for everyone.
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The video displays a real business example of how game theory was used in the tobacco industry in the early 70s with the ban on tobacco advertisements on television. It was expected that this would negatively affect the sales from the top 4 tobacco companies (American Blend, Taretyon, Ligget & Myers, and Phillip Morris); however, this was not the case. The ban on Tobacco advertisements displayed a positive sum game where all companies benefited profit-wise.
Before the ban, the Prisoner's Dilemma was shown before the advertisement band, allowing companies to decide whether to advertise. The dominant strategy of companies choosing to advertise displayed Nash Equilibrium, as companies didn't change their strategy because they already chose the decision with the highest return.
iPhone launches/Black Friday: In the earlier years of iPhone and iPad releases, there was a limited supply, encouraging a high demand for consumers to get there early to get the latest devices. The same idea is shown during Black Friday as consumers compete for discounted items. Both of these are an example of Game Theory, specifically the zero-sum strategy, as some customers "win" at the expense of someone else's "loss." This ultimately helped Apple gain more profits and brand recognizability.
Chick-Fil-A Campout Giveaways: Similar to the iPhone launch example, this is another example of a Zero-Sum game. Many potential customers camp outside Chick-fil-A in hopes of being one of the first 100 customers to receive free meals. The first 100 customers will receive free meals for the year, essentially allowing for a small subset of "winners" out of the large crowd of individuals waiting for the prize.
McDonald's Monopoly Game: In the earlier days of McDonalds, there was a monopoly game competition where customers competed against each other in return of the possibility of getting prizes. This is another example of the zero-sum game where one player's win was essentially another player's loss.
Restaurants Close Proximity: Many competing restaurants tend to be located close to each other due to Hotelling's Law. This theory suggests that similar companies are located close to each other to compete for the same customers by positioning themselves closer to the center of the market. This can also result in a Nash equilibrium, where no business benefits from changing its location.
Fortnite's High Profits: Fortnite is a bit more of a unique example. The game is an example of a zero-sum game where there is competition and only one winner. The incentive for people to win is to be awarded a crown to allow others to see they won. In addition to this, the creators of Fortnite added microtransactions (allowing users to purchase emotes, skins, etc.), which allowed players to spend money without affecting the competition. This added to the enjoyment of the game, increasing Fortnite's earnings. Microtransactions benefit both the company and the players, fostering a positive-sum game situation (win-win).
The next module will discuss how Game Theory is successful through Statistics. Click below to take you to the next page:
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Download Apple Logo, Apple, Logo. Royalty-Free Stock Illustration Image - Pixabay Chick Fil A Vector Logo at Vectorified.com | Collection of Chick Fil A Vector Logo free for personal use When Does Fortnite Chapter 4 Start? - Prima Games Kfc Vs Mcdonald's Vs Burger King Prisoner’s Dilemma | Microeconomics Hotelling's Theory - What Is It, Examples, History, Assumptions What is a Zero-Sum Game? Definition and meaning - Market Business News Nash Equilibrium: Definition, Limitations & Example3 game theory tactics, explained
Videos used in page:
Game Theory: Game theory in business world
Game theory lessons - Historical example: Tobacco companies