Game Theory and Equilibrium Outcomes Quickmba (2010)

Game Theory and Equilibrium Outcomes

QuickMBA (2010) states, "Game theory analyzes strategic interactions in which the outcome of one's choices depends upon the choices of others. For a situation to be considered a game, there must be at least two rational players who take into account one another's actions when formulating their own strategies." Assuming fair competition and antitrust laws are upheld, GE could follow a specific framework or actionable approach to maintaining its market share "when evaluating a situation in which game theory is applicable (QuickMBA, 2010)." According to QuickMBA (2010), GE should:

(1) Define the problem. (2) Identify critical factors.(3) Build a model, such as a bimatrix game (4) Develop intuition by using the model. (5) Formulate a strategy-- cover all possible scenarios.

The bimatrix game model follows.

The data does not convey any definitive conclusions with regard to GE successfully or completely thwarting Maytag's entrance into the market for high efficiency clothes through increasing advertising, as Maytag has a choice to pursue or not pursue the market space. This contingency encompassing Maytag's options indicates that Maytag would still have a choice to enter the market, even if GE implemented a heavy $12 million advertising campaign to block Maytag's entrance into the market. Furthermore, the data does not show whether an attempt by Maytag to enter the market would establish a foundational point that would foster easier access for any successive years.

Under the game theory matrix, GE appears to have the ability to deter Maytag from entering the market. Should GE implement a $12 M. advertising campaign, then Maytag could realize a maximum profit of $1M. In contrast, if GE were to implement a $.7 M. advertising campaign, then Maytag could realize a maximum profit of $15 M. In addition, as an indicator of market share, if Maytag enters the market when GE exercises it option to pursue a $12 M. advertising campaign, the profit ratio (Maytag to GE) is 1:20 or about .05. Given GE implements a $.7M advertising campaign and Maytag enters the market, the profit ratio (Maytag to GE) is 12:15 or .8. Use of the larger $12 M. advertising campaign hampers the profits for Maytag.

The only advantageous payout for Maytag would be the scenario of GE exercising the $0.7 M. advertising option and entering the market. The Maytag to GE profit ratio under this scenario would be .8, while the GE to Maytag profit ratio would be 1.25. Either ratio deviates from a ratio of 1, which indicates equilibrium, by 0.25 or less. The option for GE to implement a $.7M advertising campaign and Maytag to enter the market implies "equilibrium." However, this scenario does not represent an equilibrium outcome.

McCain ( 2010) states, "If there is a set of strategies with the property that no player can benefit by changing her strategy while the other players keep their strategies unchanged, then that set of strategies and the corresponding payoffs constitute the Nash Equilibrium." Consider the following scenarios.