How to Use Game Theory to Your Advantage in Business

Game theory has been used to the benefit of several fields of study including mathematics, psychology, and philosophy. Even though nobel prizes have been won thanks to the findings of game theory, eight to be exact, is it relevant for our daily lives? More specifically, is there a way for us to use game theory to our advantage when it comes to the world of business?

1. Example of game theory in business

The most common example of game theory usage in the world of business is within an oligopoly. Within this market business structure, companies may settle on a common price agreed upon by a majority of businesses, or rather offer a lower price that will compete with the price of its competitors. It is usually in the interest of all members of a group to collaborate and synchronize movements rather than compete. However, once one company decides to stray from the herd and take advantage of the competitive opportunities that are available, all other companies are left either suffering losses or following in these competitive footsteps.

2. Benefits of game theory

Decision analysis forms a part of game theory and allows those operating or forming part of a business to detect the moves of others as well as make the most well-rounded decisions for their own well-being.

Game theory can be used in countless fields of business. It can be useful to consider with auction tactics, marketing campaign strategies, and voting styles to name a few. In order to take into account all parties and factors involved when making a decision, game theory is ideal.

3. Nash Equilibrium

Nash equilibrium is what you are to consider when trying to make a decision during a stable point in the market, when no particular benefits are to be gained from drastic changes in strategy. Your competitors and yourself are considered to be on equal grounds, and neither of you are found to be leaning toward a change that will risk your current stability. However, in the case of Nash equilibrium, the environment you and your competitors form a part of is not cooperative.

Nash equilibrium focuses on non-cooperative competition. It takes into account the ways in which your competitors may go against you, taking these worst-case scenarios for granted. In other words, Nash equilibrium allows you not only to prepare for the worst, but to use this to your advantage as well.

A well-known instance of Nash equilibrium is found within the prisoner’s dilemma. This dilemma involves decision making without being able to cooperate or be aware of the thought processes of your competitor. For this reason, you are forced to make your own assumptions and predictions and act on them accordingly.

Conclusion

Game theory has been used in countless fields, and has now been found to be particularly useful within the field of business. In order to form a successful business and give it the opportunity to thrive on the market, there are countless factors that need to go into consideration. Among these, the most essential are other businesses that serve as your competition. Game theory allows you to take the movements, possible thoughts and decisions of your competition and use them to your advantage by counteracting them or collaborating with them. In other words, game theory provides businesses with more stable foundations upon which to make their decisions.