Game Theory Applications in Business

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Game Theory
Orton K.C. Tsun
April 1, 2012

Introduction

As individuals, we make decisions throughout the day weighing the cause and effect, cost and benefit, risk and impact of our actions on ourselves and upon others. When taken to a larger scale, as the manager of a team, the CEO of a corporation, or the leader of a nation, the decisions exponentially increase in impact and importance. Game Theory, the analysis of the concepts used in social reasoning when dealing with situations of conflict (Rubinstein, 1991), is one of many methods used to provide rational strategies towards the making of decisions. Game theory provides logical and mathematical models towards decision-making which are applied to real-life situations such as supply-chain management, capacity planning, and product portfolio management. Taking into account that there are a lot of variables to be considered in International Business, this essay will also analyze some of the inherent flaws if game theory was the only method used towards decision-making as it is applied in International Business.

Article Review

Rubinstein’s interpretation of game theory noted two basic components which are game form and strategy. Game form is described as being the construct and description of a given situation (the rules of a game) while strategy is described as the plan of action within the game which is based on the comprehension of the rules.

Applied to a supply-chain management scenario (Esmaeili, 2009), an “interactive game” involving two participants constructed with the objective of determining the identifying the most effective (profit-maximizing) strategy for the business. And of course, this varies depending if you are entering the game as the buyer or the seller. Decision points would be the price the seller charges to the buyer, the size of the order, the selling price charged by the buyer, and the marketing expenditure paid by the buyer. Certain assumptions such as whether you are a buyer or seller that you can execute one strategy at any given time which derives the conflict and need for a strategy, that a contracted amount placed for each order through the course of a strategy holding the value constant, the demand is based on selling price and marketing expenditure (profit vs. cost), and one of the participants (either the buyer or seller) can enforce their strategy upon the other party either via contract, brand reputation, government regulation, or other influential variables.

A strategic non-interactive (single player) game involving multiple variables is introduced in the context of a capacity planning scenario across factories in geographically dispersed regions (Renna, 2011), the objective is to maximize efficiency across the factories to maximize profit. This form of game is multi-faceted because the decision towards one variable (in this case, the outputs of a given plant) would have direct impact towards decisions applied to all subsequent plants. Decision variables for such a game include the market price of a finished product within the region of a given plant, the production cost of a product at a given plant, the productive capacity of a given plant, and the demanded quantity for the product in the market region of a given plant. The conflict is that production at a given plant for the product will inhibit their capacity to produce another item (loss of opportunity) and while production capacity at a given plan may be high, if the local market demand for the product is low, then the supposed efficiency cannot be leveraged towards profit-maximization. Game form assumptions applied here is that the level of overall output is held constant (due to cost) which leads to a decided output of one plant results in a reduction of that same output amount from that of other plants.

Next, we encounter an even more complex game taking attributes from both examples previously presented applied in the scenario of managing a product...
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