Application Of Game Theory In Strategic Formulation Marketing Essay

Application Of Game surmisal In Strategic Formulation Marketing analyzeThis particular article talks about the application of mettlesome conjecture in the business world. In todays highly competitive market it has become harder and much complicated to decide about the pricing strategies and bud playing of the advertisements. This article explains the concept of blue strategy with various congressmans.Keywords strategy, pay offs, pris unrivaledrs dilemma.IntroductionGame theory, a branch of apply mathematicsthat is utilize in thesocial sciences, most notably ineconomics, biology, engineering, political science,international relations,computer science, andphilosophy attempts to mathematically capture sort in strategic situations or lames, in which an individuals success in making choices depends on the choices of some others. While initially developed to analyze competitions in which one individual does remedy at anothers expense (zero sum games), it has been expanded to tr eat a wide class of interactions, which atomic number 18 classified according to severalcriteria. Today game theory is widely used in the business for solving situations in which there are a number of musicians.Companies are using the science of Game Theory to divine service them make complicated strategic finishs in this highly competitive market with least possible risk. History of Modern Game Theory is more than than 50 years old and has demonstrated anability togenerate the ideal strategicchoice in a variety of different situations, companies and industries. Principles of game theory are applied through the use of strategy games.Game theory and its applicationsA powerful tool for predicting outcomes of a group of interactingfirms where an action of a binglefirm directly affects the payoff of other participating players.Enablesa companyto formulate their optimal strategy.Ideal for strategic situations where competitive or individual behaviors provoke be modeled.For example Auctions (sealed project bids),Bargaining activities (union management negotiations),Product decisions (entry or exit markets),Principal-agent decisions (compensation negotiations, supplier incentives) andSupply chain design (capacity management, build vs. out computer address decisions).Multiple strategy games are analyses tomodel different competitors, various payoffsand potential strategies. The objective of these games is to deliverA recommended set of strategicdecisions to guide competitive behavior to a desirable outcome, andAn analysis of how a series of possible strategic moves can predict various competitive outcomes.Various types of games can be used and analysed based on the strategic situation, the number of players, the amount ofinformation accessibleand the timing constraints.Classification of game theoryThere are basically third types of gamesFully co- operative game to explain this game we can take the example of devil cyclists coming towards each other. it is i n their best interest to subjugate the collision and If they have to avoid the collision each of them has three strategiesmove rightmove leftmaintain directionThe strategy followed by one person in this suit depends on the other person. As they both dont want a collision they volition change their direction based on the opponents strategy. This type of game is called full co operative game.Zero sum non co operative game to explain this case we can take the example of the retail outlets in one locality. All of them use different pricing strategy to attract customer. in this case if store is able to attract customers it is on the account of the other retail store. In this particular case a strategy followed by one player affects the other player always. In open words the win of one person comes on the account of other persons loss.Mixed strategy game this type of game explains the situation where the interests of both the player are interdependent. But they are partly opposed and partly coincident. This kind of strategy is followed mostly in the case of union management feuds. In the case of union and the management their benefits are interrelated. At the same time they have conflicting interests as well. different classification game theory has been divided into quest categoriesStatic games this basically deals with anticipating rivals move. These kind of games involve pricing strategy, prisoners dilemma, the concept of dominant strategy, fixing up of advertisement bud channel etc.Dynamic games deals with the concept of perfective aspect and sub perfect games.Prisoners dilemmaBelow given diagram depicts the prisoner dilemma. strain 3 Prisoners dilemmaPrisoners dilemma is a beautiful concept of game theory that explains various complications that firms face while taking the decision regarding fixing the price or on deciding on the budget for the advertisement. The evidence available with police is not sufficient enough to convict these criminals to convic t. Though they are supposed to get 20 years of imprisonment if the crime is proved, they will get scarcely one year of imprisonment if the crime is not proved. if they apply the best strategy they both can avoid the conviction. The strategies that they can follow areA confesses B remains soundless A gets an imprisonment of 5 years and B gets an imprisonment of 20 years.B confesses A remains quiet B gets an imprisonment of 5 years and A of 20 years.Both of them confess both get an imprisonment of 5 years.Both remain silent both get an imprisonment of 1 year.The dilemma here is that they dont know about each others strategy and they end up confessing the crime as both of them want to avoid the 20 year of imprisonment. But if they know about the strategy of the opponent they can decide about their strategy and can get best equilibrium possible that is one year for both of them. The same theory applies for many firms in the corporate world and they end up choosing the falsely strate gy because of the opponent or the apprehensions in their mind.The Concept of Dominant Strategy Dominant strategy is the strategy followed by any player that will suppress all the strategies followed by the opponent.Eliminating Dominant StrategyIt will in the best of interests of both the rivals to eliminate the dominant strategy. One beautiful example of this is the OPEC.Nash Equilibrium A Nash equilibrium is a combination of strategies such that no individual player can deviate unilaterally from his or her to improve his pay offs.Few examples of game theory in the practical corporate worldPrice wars this can be explained by the following example imagine there are cardinal pizza providers in the city and they have different pricing policies namely- high, low and medium. There are two restaurants in a small town, pizza shack and dominos.They are in competition with each other for customers. They have three price slabs high (H), medium (M) or low (L). The customer base is 1,000 of which three hundred only ever barter for at dominoes and 300 only buy at Pizza hut. The other 400 are price-sensitive and always buy the cheaper pizza and necessitate at random if they charge the same price. Both providers make a margin of 12 per pizza if they charge high prices, 10 per pizza if they charge medium prices, and 5 for low prices. Both Dominos and Pizza hut cannot guess what the other player has chosen before they choose themselves. We can calculate profits by multiplying the number of customers with the margin per customer. For example, if dominos charges a medium price and Pizza hut a high price, Dominos will sell to his 300 loyal customers and the 400 price sensitive customers at a margin of 10 each, giving him pay-offs of 7,000. Pizza hut only sells to his 300 loyal customers, but at a margin of 12 per pizza, giving him profits of 3,600.Figure 2 pricing war between two suppliersPgIn this case three equilibrium arises one of 6/6 , 5/5 other one of 2.5/2.5. the nob le picture for both the firms is 6/6 but becausee of the price wars between them none of them are able to extractadNo adAd warsNo ad$5mcolgate$5,m$5.5m,$2mAd$2m$5.5m$2.5m$2.5mFigure 3 advertising war between P G and ColgateThis particular situation is of the two brands of toothpastes in which both of them follow different ad strategies. The decision of going for an ad and not going for an ad depends upon the opponent. They have four possible strategiesBoth of them go for adNone of them go for adP G goes for ad but colgate does not go for adColgate goes for ad but P G not.In two cases the equilibrium exists one for 5,5, and the other for 2.5, 2.5. the firms can make more money without going for any ad but as both the firms want to capture the non loyal market they go for ads and finally end up by lower margins. The dilemma here is that if one firm does not go for the ad and the other goes, then it will lose money. So guessing rivals move becomes very important here.AssumptionsPlaye rs and rational and they select strategies based on their interest.The market is equally divided in the players.Other factors are constant.Shortcomings of Game TheoryGame theory has many short comings as well and that needs to be considered.Assumes the players are rational and they play in their self-interest.This might not be the case all the time.Assumes players act strategically and consider the competitive responses of their actions. But every manager does not think inwardly a strategic context.The concept of Game Theory is most effective when managers understand the expected outcomes of the strategies they are following and the strategy that their competitors will follow.To be inadequate precise most of the companies often do not have enough knowledge of their own payoffs let alone those of theircompetition.Despiteits shortcomings, a properly constructed game can perceptibly reduce business risk, can produce valuable competitive insights, improve internal alignmentaround deci sionsand maximize strategic utility.harmonize to theThe Economistmagazine Managers have much to learn from game theory provided they use it to clarify their thinking, not as a substitute for business experience. shoemakers lastGame theory is a beautiful concept of applied mathematics. Though it has got shortcomings and its assumptions might not be applicable in all the cases it can help firms and industries in finding the appropriate strategies. Based on the pay offs, number of players and other strategic situations game theory can be helpful in developing the optimum strategies for the firms..