This is the third post in a series on game theory. The first post contrasted game theory and game studies as those are often confused. The second explains game theory using analogies, such as playing chess on an n-sided chessboard where you and the other players don’t necessarily begin the game with the same chess pieces.
This third post highlights three recent business applications of game theory. In the news recently, HP was advised by Harvard Business Review to apply game theory regarding their spiteful lawsuit to fired-CEO Mark Hurd. The author’s key point is that revenge, while perhaps satisfying to the emotions, does not necessarily yield the optimal outcome.
Subsequent to the HBR post and fortunately for HP and Hurd, the parties reached a settlement quickly. Maybe HP and Hurd applied game theory and had a keen understanding of one another. Or maybe they negotiated from gut instinct. Either way, a settlement came about quickly, which to me indicates that HP was confident in asserting their claim and risking additional embarrassment of a protracted public argument in favor of saving (some) face with shareholders.
In another example of game theory in business, AT Kearney advises their banking clients to use game theory on selection of ATM locations. In fact, it’s easy to imagine applying this thinking to location selection of nearly any retail outlet, as the emphasis is all about what your competitor will do in reaction to your selection. And it is an easy read.
In yet another example, consider NexTech Materials, a manufacturing and materials supplier for emerging energy and environmental markets. NexTech has developed an innovative family of solid oxide fuel cells. NexTech engaged Priiva Consulting to analyze the future market structure of fuel cells and other alternative green energy solution providers. The CEO of NexTech, Bill Dawson presented this analysis at Ohio’s Fuel Cell Symposium this past May. The analysis concluded that the fuel cell market has stalled because players are waiting on the other before acting. In computer science, this is called a deadlock or a deadly embrace. In everyday language, this is the “chicken or the egg” paradox. In everyday life, this might be your daily commute. The current market structure was visually depicted for NexTech in the graph below.
Each bubble in this deadlock picture is a market stakeholder, or “player”. The arrows indicate who is waiting on who? The green shaded aggressive players will act unconditionally without waiting. The yellow-shaded players are “Hesitant” and will act conditionally. The blue-shaded players are “Followers” as they also act conditionally, but unlike the yellows, few others are conditional on them.
Deadlocks mean the market will develop slowly. Deadlocks can be broken if parties are willing to coordinate and make decisions concurrently. In this market example, a success by any early adopter is actually the key to breaking the deadlock for everyone. This is a “rising tide” game structure whereby the success of one is the success of everyone.
In traditional markets, we’re taught to beat, punish, or kill competitors. However, in a “rising tide” market, all stakeholders should engage in short-term coordination and cooperation, as that is vital to long-term market viability. Said differently, a market must first be viable for customers to buy; competitors to compete; or for partners to partner.
What is the structure of your market?
Is it a battle of titans like Coke versus Pepsi? Or a “rising tide” like alternative green energy solutions? Those extremes can often be intuitively sensed.
But markets with new entrants, M&A, technology disruption, obsolescence, new business models, consolidation, government regulation, or lots of players are too complex to predict without some toolset that assists. The final structure and outcome (that is, who is left standing and who maximized their value along the way) is a complex serialized web of actions and reactions by lots of stakeholders. Game theory can provide a repeatable process to sort through that complexity.