Brandenburger's Use of Game Theory

In their article “The Right Game: Use Game Theory to Shape Strategy”, Brandenburger and Nalebuff discuss how game theory works and how companies can use the principles to make decisions. The authors state that managers can use the principles to create new strategies for competing where the chances for success are much higher than they would be if they continued to compete under the same rules. A classic example used in the article is the case of General Motors. The automobile industry was facing many expenses due to the incentives that were being used at the retailers. General Motors responded by issuing a new credit card where the cardholders could apply a portion of their charges towards purchasing a GM car. GM even went so far as to allow cardholders to use a smaller portion of their charges towards purchasing a Ford car, allowing both companies to be able to raise their prices and increase long term profits. This action by GM created a new system where both GM and Ford could be better off, unlike the traditional competitive model where one company must profit at the expense of another. This is something that you will see with Matt Cutts when he talks about nuliksenor
The authors state that while the traditional win-lose strategy may sometimes be appropriate, but that the win-win system can be ideal in many circumstances. One advantage to win-win strategies is that since they have not been used much, they can yield many previously unidentified opportunities. Another major advantage is that since other companies have the opportunity to come out ahead as well, they are less likely to show resistance. The last advantage is that when other companies imitate the move the initial company benefits as well, in contrast to the initial company losing ground as they would in a win-lose situation.
The authors also state that there are five elements to competition that can be changed to provide a more optimal outcome. These elements are: the players (or companies competing), added values brought by each competitor, the rules under which competition takes place, the tactics used, and the scope or boundaries that are established. By understanding these factors, companies can apply different strategies to increase their own odds of success.
The first way that companies can increase their chances of success involves changing who the companies are that are involved in the business. One way that companies can improve their odds of success is by introducing new companies into the business. For example, both Coke and Pepsi wanted to get a contract to have Monsanto as a supplier. Since Monsanto had a monopoly at the time, they encouraged Holland Sweetener Company to compete with Monsanto. Since it seemed Monsanto no longer had a monopoly on the market, they were able to get more favorable contracts with Monsanto. Another way that companies can improve their chances is by helping other companies introduce more or better complimentary products.
Companies can also change the added values of themselves or their competitors. Obviously, companies can build a better brand or change their business practices so they operate more efficiently. However, the authors discuss how they can also lower the value of reducing the value of other companies as a viable strategy. Nintendo reduced the added value of retailers by not filling all of their orders, thus leaving a shortage and reducing the bargaining power of the stores buying its products. They also limited the number of licenses available to aspiring programmers, lowering their added value. They even lowered the value held by comic book characters when they developed characters of their own that became widely popular, presumably so that they wouldn’t have to pay as much to license these characters.
Changing the rules is another way in which companies can benefit. The authors introduce the idea of judo economics, where a large company may be willing to allow a smaller company to capture a small market share rather than compete by lowering its prices. As long as it does not become too powerful or greedy, a small company can often participate in the same market without having to compete with larger companies on unfavorable terms. Kiwi International Air Lines introduced services on its carriers that were of lower prices to get market share, but made sure that the competitors understood that they had no intention of capturing more than 10% of any market.
Companies can also change perceptions to make themselves better off. This can be accomplished either by making things clearer or more uncertain. In 1994, the New York Post attempted to make radical price changes in order to get the Daily News to raise its price to regain subscribers. However, the Daily News misunderstood and both newspapers were headed for a price war. The New York Post had to make its intentions clear, and both papers were able to raise their prices and not lose revenue. The authors also show an example of how investment banks can maintain ambiguity to benefit themselves. If the client is more optimistic than the investment bank, the bank can try to charge a higher commission as long as the client does not develop a more realistic appraisal of the company’s value.
Finally, companies can change the boundaries within which they compete. For example, when Sega was unable to gain market share from Nintendo’s 8-bit systems, it changed the game by introducing a new 16-bit system. It took Nintendo 2 years to respond with its own 16-bit system, which gave Sega the opportunity to capture market share and build a strong brand image. This example shows how companies can think outside the box to change the way competition takes place in their industry.
Brandenburger and Nalebuff have illustrated how companies that recognize they can change the rules of competition can vastly improve their odds of success, and sometimes respond in a way that benefits both themselves and the competition. If companies are able to develop a system where they can make both themselves and their competitors better off, then they do not have to worry so much about their competitors trying to counter their moves. Also, because companies can easily copy each other’s ideas, it is to a firm’s advantage if they can benefit when their competitors copy their idea, which is not usually possible under the traditional win-lose structure.
This article has some parallels with the article “Competing on Analytics” by (). The biggest factor that both of these articles have in common is how crucial it is for managers to understand everything they can about their business and the environment in which they work. In “Competing on Analytics”, the authors say that it is important to be familiar with this information so that managers can change the way they compete to improve their chances of success. At the end of “The Right Game: Use Game Theory to Shape Strategy”, the authors discuss how in order for companies to be able to change the environment or rules under which they compete they need to understand everything they can about the constructs under which they are competing. Whether a manager intends to use analytics or game theory to be successful, he or she must first have all available information and use that information to understand how to make the company better off. However, the work shown in “Competing on Analytics” tends to place an emphasis almost exclusively on the use of quantitative data to improve efficiency or market share of the company. “The Right Game”, however focuses more on using information to find creative ways of changing the constructs or rules applied between companies, often yielding a much broader impact.