Game Theory & Strategy

Game theory is a tool for understanding how decisions/actions by players in the value net affect each other. - Play out all the actions/reactions into the

future and then reason backward to determine appropriate actions today (assumes rational behavior).

The main practical use of game theory is to help a firm decide when to compete and when to co-operate.

The Value Net

Customers

Competitors Complementors

Suppliers

Company

Customers

Competitors Complementors

Suppliers

NINTENDO

Toys “R” Us, Wal-Mart

Sony, Microsoft

Ricoh, Sharp (microchips),Marvel, Disney (game characters)

Acclaim, Electronic Art (software); Mitsubishi,Sony, etc. (hardware-TVs)

Complementor

A player is a complementorcomplementor if customers value your product more when they have the other player’s product than when they have your product alone.

A player is your complementorcomplementor if it’s more attractive for a supplier to provide resources to you when it’s also supplying the other player than when it’s supplying you alone.

Competitor

A player is your competitorcompetitor (substitutorsubstitutor) if customers value your product less when they have the other player’s product than when they have your product alone.

A player is your competitorcompetitor if it’s less attractive for a supplier to provide resources to you when it’s also supplying the other player than when it’s supplying you alone.

Changing PARTS of the “Game” to Add/Capture Value

PlayersPlayers: customers, suppliers, substitutors (competitors), complementors, you (e.g., HSC asking for pmt to play)

Added ValuesAdded Values: what each player brings to the game—raise your value added (e.g., TWA Comfort Class)

RulesRules: give structure to the game. Laws, customs, practicality, contracts. Using and revising rules to enhance the game. (e.g., MCC clauses)

TacticsTactics: moves used to shape the way players perceive the game and hence how they play. (e.g., IB fee structure)

ScopeScope: the boundaries of the game. It is possible to expand or shrink the those boundaries. (e.g., multi-market competition)

The Value Net

Customers

Competitors Complementors

Suppliers

Company

Vertical Alliances

Horizontal Alliances