Game theory is concerned with decision making and strategy and is used where there is conflict against an "opponent" such as rival organizations. It is a sort of "cat-and-mouse" strategy, trying to out-guess and predict outcomes and the opposition's strategies. Game theory can be an extremely complex tool with many variations and strategies, so it is only possible here to give what amounts to an expanded definition of the tool.
Game theory has been successful in military operations such as in World War II, with the significant defeat of the Japanese in the Battle of the Bismarck Sea off New Guinea. However, Game theory has enjoyed only limited success in business applications. This is mainly due to the fact that many situations in business are not often suited to such strategies. However, game theory is based on well-tried and verifiable disciplines for analyzing situations that involve conflict of interest and assessing possible strategies that may be used by opponents.
Examples of the use of Game theory are applicable when negotiating with trades union over pay issues, or in purchasing,
when striking a deal with a supplier for the best price, or in bidding for a contract.
One must anticipate possible actions or stances that may be taken by the
opponent, in these cases the trade union, the supplier and the prospective client.
Before going down this route it is essential to have a well thought-out plan of action. A situation may be a "finite game" which has a definite number of possible outcomes. A matrix can then be devised with the "opponent" on one axis and the "player" on the other, with possible outcomes in units within the matrix, for example money gained and lost on the specified strategies. An example of this is given later.
It is useful in these situations sometimes to gauge what the opposition is able to do rather than what it probably intends to do.
After considering what the opponent might do it may be beneficial for the "player" to change his course of action. However, the opposition may anticipate this and alter his ploy accordingly, the first player, anticipating this may then change back and a game of cat-and-mouse ensues!
An example of a complex situation is where there are several players. Here, for simplicity, only two sets of players can be described. For example, several contractors who offer a similar service to others might agree to form a coalition (Group A) and agree with other contractors (Group B) for all to restrict their services and so inflate their fees.
Clearly, it is advantageous to any to defect from the conspiracy and still provide full services at the inflated fees. Such underhand intrigues are not unusual.
Here the groups must speculate on the extent to which its members could be persuaded to abide by the agreement and make it work. Difficulties arise when some members decide to default and not adhere to the agreement.
A simplified model is shown below. This shows the results of various strategies where certain parties adhere or do no adhere to the agreement.
|Group B||Adhere to the agreement||Do not adhere to it.|
|Adhere to the agreement||A: higher profits
B: higher profits
|A: higher profits
B: lower profits
|Do not adhere to the agreement||A: lower profits
B: higher profits
|A and B: profits are unchanged|
The foregoing is a very brief description of Game theory. The theory of games is a useful tool to evaluate a complex situation concerned with decision making. It is a way of making evaluations of what will be the possible outcomes from opponents making certain decisions that could affect one's own decisions.