Making game theory work for managers

A new model, rejecting solutions optimal only for a single precisely defined future, generates answers representing the best compromise between risks and opportunities in all likely futures.

Strategy, Strategic Thinking article, Making game theory work for managers

In This Article

  • Exhibit 1: Three scenarios depict the interrelatedness of customer demand, the incumbent’s cost disadvantage, and the strength of network effects.
  • Exhibit 2: The competitive scenarios change slightly if the passengers are highly price sensitive.

In times of uncertainty, game theory should come to the forefront as a strategic tool, for it offers perspectives on how players might act under various circumstances, as well as other kinds of valuable information for making decisions. Yet many managers are wary of game theory, suspecting that it’s more theoretical than practical. When they do employ this discipline, it’s often misused to provide a single, overly precise answer to complex problems.

Our work on European passenger rail deregulation and other business issues shows that game theory can provide timely guidance to managers as they tackle difficult and, sometimes, unprecedented situations. The key is to use the discipline to develop a range of outcomes based on decisions by reasonable actors and to present the advantages and disadvantages of each option. Our model shifts game theory from a tool that generates a specific answer to a technique for giving informed support to managerial decisions.

Several factors in today’s economic environment should propel game theory to a prominent place in corporate strategy. The global downturn and uncertain recovery, of course, have prompted radical shifts in demand, industrial capacity, and market prices. Some companies, emboldened by the crisis, have tried to steal market share. New global competitors from emerging economies, particularly China and India, are disturbing the established industrial order. They use new technologies and business models and even have novel corporate objectives, often with longer-term horizons for achieving success.

[tag manager,game theory]


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