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Procedia - Social and Behavioral Sciences 213 (2015) 709 – 715

20th International Scientific Conference Economics and Management - 2015 (ICEM-2015)

Game Theory as a Tool of Project Management

.DWHĜLQD+UD]GLORYi%RþNRYia, *, Gabriela Slávikováb, Juraj Gabrhelc
a,b,c
'XEQLFN\,QVWLWXWRI7HFKQRORJ\LQ'XEQLFDQDG9iKRP'XNHOVNiãWYUĢ 41 Dubnica nad Váhom, Slovakia

Abstract

The primary purpose of the article is defining game theory as one of the creative methods of successful managing of
communication risks at educational projects of different types and sizes, with respect to economic and management specifics of
post-crisis Czech Republic. We will use critical analysis of literature and information sources, qualitative analysis by structured
interviews and by questionnaires, the analysis of available and validated results within the research on features of project managers and
their competencies, which are available and described in more detail within the annual report of the KEGA project No. 003/DTI-
4/2014. Finally we use synthesis of the above mentioned findings and facts to answer the research question and to confirm the Bilton
and Cumming’s hypothesis. From the examples mentioned in presented paper will be clear, that game theory has its place in
project management.
© 2015The
© 2015 TheAuthors.
Authors. Published
Published by by Elsevier
Elsevier Ltd. Ltd.
This is an open access article under the CC BY-NC-ND license
Peer-review under responsibility of Kaunas University of Technology, School of Economics and Business.
(http://creativecommons.org/licenses/by-nc-nd/4.0/).
Peer-review under responsibility of Kaunas University of Technology, School of Economics and Business
Keywords: Project; Communication; Project management; Risks, Games.

Introduction

Without realising it, we experience many conflicts in our every-day lives. It does not only need to be a married
couple argument or a political crisis. It can also be very common incidents, like shopping in a local groceries store
or playing cards, as well as specialised events, like explaining evolution biology or trading on stock markets. All
these conflicts are connected by game theory, a mathematic field of expertise which can be used by the participants
to their benefit.
The primary purpose of the article is to try to identify such aspects of game theory, which can fill a gap of the
game theory application in project management, because an idea to analyse game theory as a tool of project

.DWHĜLQD+UD]GLORYi%RþNRYi7HO905 692 227.

E-mail address: [email protected]

1877-0428 © 2015 The Authors. Published by Elsevier Ltd. This is an open access article under the CC BY-NC-ND license
(http://creativecommons.org/licenses/by-nc-nd/4.0/).
Peer-review under responsibility of Kaunas University of Technology, School of Economics and Business
doi:10.1016/j.sbspro.2015.11.491
710 Kateřina Hrazdilová Bočková et al. / Procedia - Social and Behavioral Sciences 213 (2015) 709 – 715

management is relatively new and relevant, and there is no many research and application works trying to fill this
gap.
The research question is: “Is it possible to consider the game theory as one of the creative methods of successful
managing of communication risks at educational projects of different types and sizes, with respect to economic and
management specifics of post-crisis Czech Republic?”
To fulfil the high cited purpose and to answer the research question we will use these methods:
x Critical analysis of literature and information sources.
x The analysis of available and validated results within the research on features of project managers and their
competencies, which are available and described in more detail within the annual report of the KEGA
project No. 003/DTI-4/2014 (qualitative analysis by structured interviews and quantitative analysis by questionnaires
sent to project managers about application of specific approaches and methods to risk management and
communication in educational projects).
x Application of game theory in current economic situation in the Czech Republic, with the aim to find a specific
example of application of the prisoner’s dilemma and its correlation with a specific situation and subsequent
transformation of the findings into its use by project managers for elimination of communication risks at educational
projects.
x Synthesis of the above mentioned findings and facts to confirm the Bilton and Cumming’s hypothesis (2014) that
the use of game theory makes it possible to understand the needs and interests of the involved persons in a
better way and to finalize the project successfully.
From the examples mentioned in presented paper will be clear, that game theory has its place in project
management and is for it quite utilizable. Besides, a well-defined communication strategy built on the principles of
game theory may reduce or eliminate the probability of risk (problem) creation.
The theoretical contribution of presented paper consist in defining game theory, describing the specifics of
game theory in post-crisis Czech Republic and formulating of a game theory application in project management.
The practical implication of found results is:
x confirmation of Bilton and Cumming’s hypothesis published in (Bilton, Cummins, 2014) stating that using game
theory helps understand the needs and interests of the involved participants in the project and eliminate eventual
communication risks, hindering the successful completion of the project,
x identifying of game theory aspects applicable in successful managing of communication risks at educational
projects.

1. The Game Theory

The game theory as a mathematical field was founded by Hungarian mathematician John von Neumann, the
author of the article named On Game Theory (1928), in which he proved basic sentences of matrix games. Together
with Oskar Morgenstern they published the book of Game Theory and Economic Behavior in 1944 (Hykšová,
2004). Game theory was able to find most applications in economy. Many mathematicians were awarded the Nobel
Prize for Economy for research on this field.
The game theory is one of less known areas of exact mathematics, mingling with humanist sciences, with focus
on the psychological aspect of the individual. Therefore, it is not only a useful tool in the hands of scientists, but also
on fields that are more attractive to the lay public. However, it would be wrong to think that game theory is able to
find a way to win at every conflict. When you are a part of the game and decide on the next steps, you need to take
the choice of the others into account. However, when you think about their choices, it is necessary to count with that
that they are thinking the same way. In the moment of coming up with own strategy reflecting the ideas of the other
“players”, you need to know they are doing the same. And this goes on and on, as stated by Godin (2012). Simply
said, according to Sawyer (2012), “the content of game theory is analysis of a very wide spectrum of decision
influencing situations“.
The “prisoner’s dilemma” is a classic example of game theory (Godin, 2012). We rank it to the non-zero-sum
games. The dominant strategy is non-cooperation, meaning that no matter what strategy the other player chooses,
non-cooperation always results in better result for the player than cooperation (FAJRONT©2005). Below, we
 Kateřina Hrazdilová Bočková et al. / Procedia - Social and Behavioral Sciences 213 (2015) 709 – 715 711

describe an example of application of game theory, used to analyse a price war situation.
In economic recession, we can observe a specific competition war between two strong companies, creating a
duopoly. These companies usually operate on a part of the market, being a monopoly there. During a crisis, these
parts of market usually merge, creating an all-state market with for the product. The question is, whether it is better
for the companies to accept the new power distribution or to try push the competition out and keep the previous
monopoly position.
The answer? AC0 is the value of average costs of one company, AC´ being the value of average costs of two
companies. If AC´ is higher than AC0, the total costs would be significantly lower if the market of the product was
monopolistic. Therefore, from the point of view of the companies, a fusion might seem to be a very attractive
option. However, such a step would probably have to be investigated by the Anti-Monopoly Office. And let us not
forget that many companies do not co-operate because of strong rivalry.
Another option is creation of competitive prices. A price war stars with declaration of one of the producers about
significant price decrease with the aim to push out the competitor of the market. It is obvious that thanks to lower
prices, the profits will not be maximised. However, the producer attacking first will acquire a significant portion of
the competitor’s customers. The competitor has no other choice but decrease his prices, as well. But the price cannot
drop under the cost limit, although the producer may sell his products with no margin.
During price war, both companies lose money. And at the end, one of them - usually the smaller, younger, less
known one or the one with less significant backing - leaves the market. The company which stays, reclaims its
monopolistic position, but with high losses the company might not recover from. The company which declared the
price war counts with restoring the prices and heal its profit wounds, as soon as it reclaims the monopolistic
position. In general, the longer the war takes, the higher the losses are and the higher the long-term profit must be. If
the market as a whole develops well and healthy, it is usually better for the companies on it not to provoke a price
war. It is clear that nobody wins in a price war – one of the companies has to leave the market and the other one is
weakened and its war expenses have to be paid by the previously satisfied customers.

2. The Game Theory and its application in post-crisis Czech Republic

An interesting and by media often shown example of price war is the long-term fight between the bus transport
FRPSDQLHV RI $VLDQD RZQHG E\ $OH[HM /LWYLQ DQG 6WXGHQW $JHQF\ RZQHG E\ 5DGLP -DQþXUD LQ WKH &]HFK
Republic. Their conflict started in 2007 at the line from Praha to Karlovy Vary. Student Agency reduced the ticket
price to 120 CZK, some of the tickets even cost only 50 CZK. Asiana was not able to decrease the prices under 140
CZK, therefore, it was forced to leave the line on August 2007.
On 01.10.2007, the price war shifted to the most lucrative line in the Czech Republic - from Brno to Praha.
Whereas Student Agency was operating thirty buses per day from and to these cities, Asiana started with only eight.
After the introduction of a system of discounts and higher service, Asiana lost this battle two months after. The next
battle took place already in 2009.
After Student Agency introduced some tickets for a symbolic price of 1 CZK, Asiana was not able to cover the
losses and left the market to the bHQHILWRI5DGLP-DQþXUD7KH&(2RI6WXGHQW$JHQF\DQGIRUPHUHQWUHSUHQHXURI
the year has now only less significant competition of regional bus transport operators, he frequently co-operates
with. And he has to deal with some lawsuits with the owner of Asiana.
This example seems to deny what we just established in the beginning of this chapter – the victorious Student
Agency walked out of the fight stronger than before and Asiana did not terminate its business activities. The reason
of this is a less known fact that bus transport is only less significant part of the business activities of both of these
competitors (to be exact, only 23%). The bus transport conflict only became an arena and relatively cheap form of
marketing, funded by profits from very lucrative flight tickets and accommodation sale and other additional
services. Despite the expensive war price and the impact of economic crisis, both these companies might have
reached a y/y profit growth this year.
As indicated, a price war is almost always unfavourable for all participants. However, it is not to be avoided time
to time. We have established that the participant who provokes it, anticipates higher market share for the price of
lower profit. Thanks to retaliatory actions of the competitors, there is often significant profit drop in the whole
712 Kateřina Hrazdilová Bočková et al. / Procedia - Social and Behavioral Sciences 213 (2015) 709 – 715

segment. Therefore, let us find a strategy that would bring the participant profit or at least minimise his losses. When
does it make sense to conduct price war?
x If the company is economically strong enough. Nokia, the Finnish producer of mobile phones, with the profit of
9.8 billion EUR in Q3 2009 (source: Reuters), will certainly have bigger fighting chance than the local
competitor of Emgeton.
x If the company operates a bigger market. A producer with customers in several countries can pay his war losses
by higher prices of exported goods.
x The price war can be used for marketing purposes. The participants will suffer profit losses, but can rely on
unpaid advertising in the media. In this way, they demonstrate their power and economic activities to the
competitor.
x The company may reach profit, if it offers significantly better services than the competitor. What counts is the
quality of the service, warranty period and fast delivery.
x The monopolistic position can be reached, if the competitor is a very unstable company with low profits. Such a
counterpart will not survive more losses and will be forced to leave the market.
What to do when price decrease is not an option? The research of Hong Kong scientists Chun-Hung Chia, Tsan-
Ming Choia and Duan Lia (Zyga, 2009) is not very known in the Czech Republic, but it comes with an unusual
solution called reverse price war. It works with the premises that by decreasing the prices, the more successful
competitor claims more market share. However, part of the customers stays with the other company. The reasons are
similar as in our recommendations – better service, tradition of the brand or higher quality. The more customers
switch to the competitor, the worse for him. His profits will keep dropping, and losses adding up. Therefore, the
more reasonable strategy for the attacked competitor is not lowering the prices (and provoke a vicious circle of
discounts leading to a bankruptcy), but slightly increasing them. By this solution, the company compensates the
losses it suffered from loss of customers and after some time, can profit more than the cheaper competitor.
Although it is hard to find successful application of such strategy, we can find indications of reverse price war
also on the domestic market/HWXVPHQWLRQWKHEHKDYLRXURIýHVNê7HOHFRPWRGD\7HOHIRQLFD2ZKLFKUHDFWHG
to the competition of mobile phone operators by increasing its services in 2006.
It is natural that most managers will be sceptical towards such a strategy. However, it can be anticipated that it
might be very successful thanks to its unusualness, especially when fighting a less experienced competitor. The
scientists also suggested a less radical strategy of no-action strategy. Applying it, the attacked company stays
absolutely passive. By not reacting to the competitor’s price attacks, the company will suffer losses, but will not
have to face the above mentioned results of an active price war.

3. As it applies to project management

Game theory was first developed to predict situations where one player does better at another's expense. „Today,
game theory has expanded to treat a wide range of situations and interactions, including human as well as non-
human players (computers, for example). As such, game theory is an excellent tool for project management“
(BRIGHTTHUBPM©2012).
Project managers manage the links between related projects, decide on resource priorities and report progress of
the project to the appropriate people. This authority, responsibility and accountability is an important and
demanding role. This mostly involves dealing with people; negotiating with them and arriving at a solution that
keeps the project moving forward. It is in these negotiations that game theory can be an essential tool for project
management, because game theory is a mathematical method for analyzing calculated circumstances, such as
in games, where a person’s success is based upon the choices of others. More formally, it is “the study of
mathematical models of conflict and cooperation between intelligent rational decision-makers.”
(WIKIPEDIA©2015)
To bring it into perspective for a project professional, Game Theory is about establishing and planning your
project to be a ‘game’ that allows you to maximize gains and minimize losses, but it is based on applying decision
making not only in terms of your own knowledge and strategies but more importantly also those of others in the
 Kateřina Hrazdilová Bočková et al. / Procedia - Social and Behavioral Sciences 213 (2015) 709 – 715 713

‘game’ or project in order to ensure success. Applying this concept to every stakeholder in your project will help to
see things in a radically new way, as it s described in (Toppenberg, 2011).
Project managers manage many different areas including the links between related projects; we decide on
resource priorities and report progress of the project to the appropriate people. The authority, responsibility and
accountability in this role make for an important and demanding role. As we know the activities we perform mostly
involves dealing with people; negotiating with them and arriving at a solution that keeps the project moving
forward. It is in these negotiations that game theory can be an essential tool for project management.
While playing the games can teach us much about how players interact in a specific setting, applying those rules
and observations in real-life examples can be even more rewarding. For project professionals this can be helpful in
many ways, says Bloch (2015).
There is no many research and application works trying to describe the game theory application in project
management, especially its application to avoid communication risks at educational projects of different types and
sizes, with respect to economic and management specifics of post-crisis Czech Republic.
Some details we can read mostly in internet sources, like (BRIGHTTHUBPM©2012) and (Hatfield, 2015) or
(Toppenberg, 2011). For more information on Game Theory and to dig deeper into the application of game theory in
business, “The Art of Strategy” by Avinash Dixit and Barry Nalebuf is an excellent start. Very interesting paper by
Gil Junqueira is retrived from http://www.projectsmart.co.uk/cutting-edge-project-management-what-game-theory-
and-poker-can-teach-us.php. With the specifics of game theory application in solving the construction projects
conflicts deals the paper published on the 6th International Strategic Management Conference in 2012 in Spain, that
is retrived
from http://www.academia.edu/1857937/Application_of_Game_Theory_Approach_in_Solving_the_Construction_P
roject_Conflicts.

Conclusion

As seen above, it is possible to use game theory as a project management framework. On a day-to-day basis,
project managers need to solve problems to keep projects on track and ensure that all those involved are motivated.
As mentioned, this often involves negotiation. Here are some things that project managers need to think about in
any negotiation process:
x What is the issue you are trying to solve?
x Who are the players?
x Which players will have an impact on the success of your decision?
To use game theory for project management, draw a list of players keeping the above questions in mind. For each
player then answer the following questions:
x Are there any time issues? Who is in a hurry and who can afford to delay? Will players make decisions
independently or wait for other players make decisions?
x What players can make a commitment to help you and the project? Prioritize these players.
x Have you got an angle to negotiate? Mutual gain is possible if players have different preferences, priorities or
capacities. Where mutual gain is likely, a negotiated outcome is possible.
x What are the players’ goals? Put yourself in each player’s shoes and assume their goals and actions will be
rational from their point of view, even though you may not agree.
It is helpful to put these questions and players in a simple table to clearly show different choices, or tree diagrams
that follow steps of an interaction. By looking at the possible outcomes and working backward, project managers
can choose the strategy most likely to give the best results.
Using game theory in the above manner helps you understand how people act and interact – an essential skill
needed to successfully manage projects and to aviod the communication risks in educational project.
The principles of game theory and the games that emerge as a result of the principles are very interesting and can
help us think of different ways of interacting with the people around us, especially those in professional settings.
The fact that the principles centers around playing games helps us to tease out the most fundamental actions and
behaviors in a human being, since playing games is what comes natural to us. The fact is that we play games every
714 Kateřina Hrazdilová Bočková et al. / Procedia - Social and Behavioral Sciences 213 (2015) 709 – 715

day whether we know it’s a game or not. With this in mind we can explore how we might utilize this information as
a framework:
x As negotiation and communication are primary tasks of project managers, let’s root the framework in this, and
since game theory is as much about own our strategy as well as knowing the strategy of those around us.
x As we prepare for and approach a situation of negotiation consider the following questions:
- What does the person stand to gain or lose? Are they under a time constraint?
- If cooperative, would it be in our best interest to share details prior to the negotiation, and is it to the mutual
benefit to determine if we will negotiate simultaneous or sequential.
- What are the mutual and achievable goals for cooperative, and for non-cooperative, what are the goals of the
person we are negotiating with?
- Is the person able to make commitments on behalf of only themselves or others?
- Evaluating the other persons strategies, what are some potential risk areas of our strategy or approach? How can
they use what they know about us to their advantage?
Just we would act as we play a game of poker with our friends, we must now decide how we approach any
stakeholder on our project, decide for each person as we engage them what their strategy is and what they desire to
achieve.
The game theory application goes through the teamwork as well. As project managers we thrive on working as
parts of cross-functional and diverse teams, undertaking planning and management responsibilities towards and
stated set of success criteria. While much of what we spend our time on is following a prescribed set of tasks,
managing our teams through obstacles and removing road-blocks in the way, the ultimate success of our efforts is
how well we know our teams and our resources at hand.
From the above mentioned examples, it is clear that game theory has its place in project management and is for
it quite utilizable. Besides, a well-defined communication strategy built on the principles of game theory may
reduce or eliminate the probability of risk (problem) creation. Here are a few areas that applying the principles and
learning of game theory can be beneficial:
- Contract negotiations with vendors.
- Resource negotiations with stakeholders and resource managers.
- Task Assignments.
- Team management.
The research question was answered. The Bilton and Cumming’s hypothesis was confirmed.

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