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Idea --- Game theory

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Nov 24th 2008 | Online extra

The idea of business as a game, in the sense that a move by one player sparks off moves by others, runs through much strategic thinking. It is borrowed from a branch of economics (game theory) in which no economic agent (individual or corporate) is an island, living and acting independently of others.

In sectors where firms compete fiercely for market share and customer loyalty, this stylised progression of moves closely parallels actual behaviour. Few firms nowadays think about strategy without adding a bit of game theory. For John von Neumann and Oskar Morgenstern, the two economists who developed the idea, strategy was “a complete plan: a plan which specifies what choices [the player] will make in every possible situation”.

Seeing business life as a never-ending series of games, each of which has a winner and a loser, can be a handicap. In business negotiations, for example, with external suppliers or customers, or with trade unions or colleagues, it can be unhelpful if participants see it only in terms of a victory or a loss. For that way one party has to walk away feeling bad about the outcome. In some non-western cultures the aim is different. The negotiation process is steered towards a win-win outcome, one with which both parties can be reasonably content.

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The language of business is scattered with references to games. Regulators try to make sure that companies operate on a “level playing field”, and competition is, according to at least one dictionary, “a series of games”. Business games that have enjoyed (sometimes brief) popularity include the following:

The end game. This is a strategy for a product that seems to be on its last legs. Should the company bleed it for all it is worth before it dies? Or should it introduce an aggressive pricing policy aimed at forcing its competitors out of business and allowing it to continue in a much reduced niche market? In her book “Managing Maturing Businesses”, Kathryn Harrigan, a professor at Columbia Business School, argues that end games can be highly profitable. She writes: “The last surviving player makes money serving the last bit of demand, when the competitors drop away.”

The croquet game. In “The Change Masters”, Rosabeth Moss Kanter (see article) wrote:

I think the game that best describes most businesses today is the croquet game in “Alice in Wonderland”. In that game nothing remains stable for very long. Everything is changing around the players. Alice goes to hit a ball, but her mallet is a flamingo. Just as she's about to hit the ball, the flamingo lifts its head and looks in another direction. That's just like technology and the tools that we use.

The win-win game. This is a game where both parties end up as winners; for example, a merger between two companies where synergy genuinely allows them to become more than the sum of their parts.

The zero-sum game. This is shorthand for the idea that in every game, whether in business or on the sports field, the value of the winner's gains and the loser's losses is equal. In such games there is no incentive to co-operate with opponents because every inch given to them is an inch lost. The idea of the zero-sum game is modified by the introduction of the possibility of change in the nature of the game while it is being played. Hence, for instance, companies that are fighting for market share are playing a zero-sum game if they see that market as fixed. But if the market is continually expanding (or if the companies redefine it so that it is), the players are playing a game in which they can have a declining share of a bigger cake and still see their businesses grow.

Further reading

Berne, E., “Games People Play: The Psychology of Human Relationships”, Grove Press, New York, 1964; Penguin, 1968

Friedman, S.D., Christensen, P. and DeGroot, J., “Work and Life: the End of the Zero Sum Game”, Harvard Business Review, November–December 1998

McDonald, J., “Strategy in Poker, Business and War”, W.W. Norton, 1st edn, 1950; 1996

Shubik, M., “Games for Society, Business and War: Towards a Theory of Gaming”, Elsevier, 1975

Sun Tzu, “The Art of War”, 500 BC (Oxford University Press, 1963)

Von Neumann, J. and Morgenstern, O., “Theory of Games and Economic Behaviour”, Princeton University Press, 1944; 60th anniversary edn, 2004