“Business is game theory” — every business person who spends their days pitting his wits against competitors must feel this way。Contract negotiations with customers, job fights within the company, new product development and market share battles with competitors。Normally we play business games based on our intuition，But if you want to do a more systematic analysis, you need to have a deeper understanding of “game theory”
“Game theory” is based on the work of John von Neumann, one of the great geniuses of the 20th century，
and his colleague, The economist Oscar. Oskar Morgensten based his 1944 book game Theory and Economic Behaviour.They thought that human economic activity might follow certain rules like chess, and they analyzed it with a game method, but this mathematical method was very difficult to understand. They found that when there are multiple players in a game, the actions of those players are influenced by the actions of other players. Predicting the movement of other players is particularly important in these kinds of games (interactive games), and to be able to do this requires a system theory foundation capable of making very complex guesses, which is the essence of their research.After half a century of development, game theory has been applied in almost all economic fields, such as macroeconomy, industrial and Asian organization, international trade, finance etc. Many economic phenomena and actions can be analyzed using models based on game theory. This kind of analysis of economic phenomena in real society using game theory still exists until now. Bo Ben’s theory, as a basic tool to understand the behaviour of current economic subjects, has become an indispensable existence.
Academic Research
1，prisoner’s dilemma：In a one-to-one single simultaneous game known as the Prisoner’s dilemma, if each player chooses the dominant strategy, it leads to worse outcomes than cooperation.But in real business activities, it is very common to betray the other party for their own interests.Even in simultaneous games, there is no dominant strategy.
2，Nash Equilibrium：Nash equilibrium refers to the state in which all participants “choose their most appropriate strategy in consideration of the strategies adopted by other participants.” There is not just one equilibrium, but many. In a state satisfying Nash equilibrium, any participant who breaks the peace and adopts other strategies will damage their income so that this stable state will continue forever.
If each player has a dominant strategy, there’s only one solution. Dominant strategy is a very powerful concept in Boben theory, and it is difficult for participants to choose other strategies than dominant strategy.In real games, there is not always a strategy satisfying the condition of dominant strategy.There is no dominant strategy, but there are many balanced choices acceptable to both players. This equilibrium is called a Nash equilibrium.
3，Matching pennies and mix strategy
In the game without pure strategy Nash equilibrium, the mixed system with randomly selected strategy is always effective. In addition, the situation in which one’s expected returns remains constant no matter how randomly selected the other party is called mixed strategy Nash equilibrium. Even in games with pure strategy Nash equilibrium, there may be combined strategy Nash equilibrium. Compared with pure strategy Nash equilibrium, the expected return of mixed strategy Nash equilibrium is lower. When choosing among multiple equilibrium strategies, the return disadvantage and symmetric equilibrium can be used as the selection criteria.
4，Continuous strategy, continuous returns and The theory of competition under oligopoly：When the market is oligopoly and has an infinite number of pure methods. Cournot competition model and Bertrand competition model can be used to analyze the systems. In this case, one’s gains are affected by the design of the other. Nash equilibrium also applies to situations where there is an ongoing strategy.
Cournot’s competition model is a model proposed by French economist Cournot in 1838 before the advent of Beaubien theory. In this model, several oligopoly enterprises produce, and the total output will affect the price of products. Specifically, Cournot’s competition includes the following elements.
·A market is an oligopoly of several companies.
· The price of a product in the market is determined by the total production of several firms.
·To maximize returns, producers need to determine their output.
In game theory, there is another oligopolistic game model that is as famous as Cournot’s competition, Bertrand’s competition. Bertrand competition was proposed in 1883 by Bertrand, a Frenchman. The biggest difference between Bertrand’s competition and Cournot’s competition is that the determining factor is not quantity but price. The producer who can offer the lowest price will monopolize the market. Bertrand’s competition consists of the following elements.
· A market is an oligopoly of several companies.
· The producer offering the lowest price will monopolize the whole market (producers offering the same price will evenly divide the market).
·To maximize returns, producers need to determine the price of their products.
If Cournot competition is the strategy of making endless choices to output, then Bertrand competition is the strategy of making continuous choice to price.
Future development
With the increasing progress of game theory research, the application scope of game theory has gradually developed from microeconomics, finance, marketing and other fields based on mathematical approach to business strategy, human resource management, law and other areas that have always been centred on qualitative discussion.
But that does not mean that game theory is the master key to solving all business problems. Like many theories, game theory has its limits. Although game theorists have struggled to overcome the continues, game theory still has many unsolved problems.
Game theory is important in analyzing situations in which the actions of other players affect you. Therefore, game theory is widely used in law, politics, business and sociology. In the past decade, many business schools have applied the essence of Boben idea to teaching business strategy, finance, economics and other fields. The time is coming when Mbas mastering game theory can use this powerful weapon to business decisions.
