Game Theory Work in Practice

¶ … Game Theory Work in Practice

Game theory is often described in terms of the prisoner's dilemma, where a captured prisoner must decide to confess or remain silent, even though he or she possesses imperfect information about his or her accomplice facing the same decision. As the article astutely points out, in the marketplace, the 'prisoners' in the real-life deployment of game theory are competitors in the same market. A certain amount of intuitive collaboration is required so that prices do not go too low in a price war, even though having lower prices can benefit an enterprise but all businesses operate with imperfect information. To 'win' the best feasible solution for one's side, a variety of scenarios must be assessed. Evaluating entry costs, exit costs, demand functions, revenue structures, and cost curves may all be critical in creating future, projected possibilities for the company, and decision-makers must choose the best of all projected futures based upon the likelihood of the different scenarios occurring.

One effective example used by the article is that of the airline industry, which demonstrates that both large and small companies can use game theory. A small company can slash prices and thus make crucial market inroads against major competitors, like Kiwi Airlines, or conversely a large company can make more effective use of economies of scale. Game theory is not equally useful to all industries, in general the larger the industry, the more difficult it is to create accurate scenarios, as eventually the variables that must be analyzed grow too complex and numerous. Also, the article suggests that more aggressively competitive industries, with high fixed costs, and only few 'big deals' will tend to benefit less from game theory, which may seem to somewhat undercut its statement that game theory is growing more useful today -- after all, in many industries, competition has grown even more fierce. But the consolidation of many markets, combined with the future uncertainty of how competitors and consumers will react to shifts in data seems to support the idea that game theory can be very useful to many businesses today when making crucial decisions.