Game Theory in the Business Field

on Sunday, 08 October 2023. Posted in Business Analytics

Photo by Jose Castillo on Unsplash  

How can you maximize your chances of achieving the most desired outcome in the ever-changing field of business? Welcome to Game Theory, a study of the reasoning behind the decisions we make in our day to day lives, whether it be negotiating a price at a local vendor, deciding whether to invest in a company, or simply buying a product at a given time, Game Theory is essential in making wise economic decisions. 

Through an analysis of why Game Theory is such a necessary study in making rational decisions in the face of scarcity, you will be able to fully grasp the behavior of oligopolies — small markets that can thrive on their own — and understand how competition works between different players in the competitive market. 

The concept of Game Theory has become increasingly valuable in the business field, especially for marketing, as marketers have to predict the decision-making behavior of consumers. Game theory can help managers choose the best strategies for customer acquisition, retention, and satisfaction, This information can also help plan staff recruitment, training, and development strategies

Although Game theory does not take the element of uncertainty into consideration, it still does prove to be pivotal in making day-to-day decisions, not solely in the business world. Much like a video game, Game Theory requires strategy, incentives, and interaction between different players. These “games'' involve how firms react to changes in competing prices, CEOs react to uncooperative employees, and shops raise/lower prices in response to consumer tastes. Likewise, when your deck of characters, number of lives, or management of characters and products in the digital world is insufficient, how are you to proceed with the best possible course of action? 

 The format of these games can be demonstrated by the prisoner's dilemma, the dictator game, and the hawk-and-dove. 

In 1950, John Nash wrote a defining PNAS article that characterized a notion of equilibrium — or best possible choice —  for n-person games. Now deemed the “Nash equilibrium,” it is considered one of the most important concepts and centerpieces of Game Theory due to its ability to logically determine the best possible action for one to take in various circumstances. For instance, if a company is looking for the best possible option in choosing a brand of computers to upgrade to, Nash equilibrium would point towards purchasing the brand that offers the cheapest computer, all things equal. 

Whether in important business decision or daily simple choices, Game Theory Proves to be an effective method in making decisions.

Written by Daisy Wang

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