GAME THEORY AND BUSINESS

STRATEGY
GROUP 14
INTRODUCTION

• Formulated in 1940’s by John Von Neumann and Oskar Morgenstern

• Game theory is an analytical tool that allows decision makers to deal with
interdependence and uncertainty around the reactions of competitors,
suppliers or customers towards any decisions that the team takes
THIS TYPE OF ANALYSIS INCLUDES 3 STEPS

1. Problem Formulation: clarity around the question we want to be addressed is of paramount

importance.
2. Model building: post formulation, questions such as “ who are the players”, strategic environment,
Rules of the game need to be answered.
3. Decision: The analysis is important as it helps in getting a hint about the likely outcome of strategic
interactions
THE SALE OF UNITED CEMENT’S B PLANT

• Problem statement : United’s Plant B is currently idle and are considering the sale of the plant
• Two local competitors in cement Industry : United cement company and Associated cement company
• United has 8000-ton and an Idle 2000-ton plant and Associated has a single 20,000-ton plant
• Current market price for cement is $5 mil for each 1000 tons of cement
• Marketing indicated that reducucing the price to $4 mil for each 1000 tons of cement would likely shift
half of the other firm’s demand
A BIMATRIX GAME

• A bimatrix game is a simultaneous game for two players in which each player has a finite number of
possible actions
• A model to compare the Pros and Cons of the possible results making a strategic decision with the
possible results of competitors taking the same Decision
• The name comes from the fact that the normal form of such a game can be described by two matrices -
matrix A describing the payoffs of player 1 and matrix B describing the payoffs of player 2
• A Comparison matrix which:
• Accredits that the Competitors are as intelligent as we are.
• Involves a number of assumptions to ease out the work.It doesn't consider the pricing/market Dynamics which
could undermine the predictions.
A GAME TREE ANALYSIS OF THE SALE
PROBLEM

• A game tree analysis to buttress the bimatrix analysis

• As indicated in figure, a game tree consists of a set of
decision nodes that are connected by branches.
• These branches further extend from a decision node to
other nodes represent the complete set of possible
actions that can be taken as decision.
• As game trees depict sequence of decisions, they are
the most natural tool used for depicting sequential
choice game.
THANK YOU!