Game Theory & Business Strategy: Weekend @ Wharton
The City of Brotherly Love, they call it.Yep, spent the weekend out in Philly and finally got a chance to visit the esteemed Wharton School of Business.
Couldn't resist the UPENN bookstore, where I was greeted by a glorious faculty publications section.
I settled on one book to bring back to New York -- "Wharton on Competitive Strategy."
It was a smart buy.
You get the top 2 marketing professors @ Wharton to co-author a book -- you bet it is going to be worth your time reading.
Marketers are strategists -- they love to think in terms of numbers and probabilities.
It is almost like war.
Let me explain.
Good business strategists are like good chess players.
Good strategists don't think one move or step ahead ahead of the game - they think 2 or 3 steps ahead.
Prescience is key.
It is what gives a company an edge over its competitors.
MBA professors like to use Game Theory as a lens through which to look at business tactics and strategies.
Essentially, Game Theory postulates that no 2 players (by extension, companies) operate independently of each other.
Say, for example, Company XYZ decides to cut prices on its widgets.
Typically, that company's closest rivals, ABC and DEF, will respond by also cutting costs.
However, replicating a price-lowering tactic is NOT always good business sense.
We're all familiar with the term "price wars."
That is exactly what happens when 2 or more companies have little else to compete on but cost.
One prominent example is the Airline industry.
According to Professor Michael Porter -- who defined the field years ago when he published "Competitive Advantage" and "Competitive Strategy" -- companies compete on 2 levels : Cost (lowest price) and Differentiation (quality).
Some airlines will offer the lowest prices; others will differentiate themselves from the rest by investing in their brand equity and quality control in order to sustain customer loyalty.
Rarely can a firm do both.
The thing about price wars is that they are anti-productive.
Per-firm profits wane when more firms enter the market and they all start mimicking each other.
This could be a sign that a market is maturing (because growth is slowing).
To give you a recent example, the Netflix vs. Blockbuster Video (even Walmart got involved) price war resulted in both companies losing profits while raising the cost of doing business.
No one wins when price wars fire up.
Game Theory serves as a consistent framework for structuring competitive decision problems.
In other words, Game Theory can be a manager's best friend.
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