Posted in Human Resources Articles, Total Reads: 3103
, Published on 16 June 2011
Creativity, innovation and ideas are all essential in the world of business. Every organization tries to outwit the other competitors by always trying to stay ahead. Breakthrough products, intelligent advertising campaigns and new marketing concepts all help business organizations in gaining momentum. But this seems simple only in an ideal situation. In the real life, no matter how much one is prepared he always has something unexpected in store. And this is where a very significant management-cum-psychological concept comes in the picture- the Game Theory.
Game Theory is a critical analysis methodology which identifies competitive situations in the field of business, war, strategies etc where the outcome of a participant's decision is critically based upon the decision of the competitor. Game theory is a study where decisions taken by organizations are dependent upon the course of action selected by their competitors. Thus, before jumping to any decision, organizations much study, analyze and understand all perspectives and possible decisions that their competitors might take. And thus, game theory is a pivotal process in the decision making scenario of companies. Game theory can be best explained by the most popular example of prisoner's dilemma.
Prisoner’s dilemma is a situational analysis where 2 suspects, who are partners, are interrogated separately for a possible crime that they have committed together. In prisoner's dilemma, each suspect is individually asked to confess his crime as by doing so he would be let go, and the other person would be punished. Similarly, the second culprit too is asked to confess. If both remain silent, then they would be punished only for a small time. However, if both crumble under the pressure and betray each other, both have to serve a longer sentence. Also, each one is assured that their decision wouldn't be told to the other one. This becomes a conflict of minds for the two suspects as their individual decisions can decide their fate.
The prisoner's dilemma can be summarized as below:
Similarly, the game theory can also be implemented in the business scenario. Each organization wants to maximize profits, and the simplest way of getting more revenue is by increasing the price of the products and services. For e.g. there are two competitors in the market with similar products. To maximize their revenue, they would look to set a higher price. However, if the competitor sets a lower price, then the advantage goes to the competitor and the organization sets to lose some of its market share. Hence, the decision to vary prices is dependent on the decision taken by other competitors in the same competing segment. Thus in the field of business, game theory stands for decisions taken in strategic situations, keeping in mind the decisions taken by competitors, to maximize returns.
This can be summarized by a simple tabular analysis in terms of win or lose margin.
Business decisions are extremely critical for the growth of business organizations. Critical decisions like marketing innovation, increasing investments, creating new products, changing marketing campaigns, fluctuating prices etc are all essential for companies. But companies need to be aware of the impact of their decision on the market environment and vice versa. And this is where the concept of game theory will always lead to a conflict of minds.
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