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    Quantitative Manangement and Decision Making

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    Vaibhav Rakheja
    This document discusses the application of game theory in business model development and decision making. It provides an example of how game theory can be used both inside and outside of a firm. Inside a firm, game theory models the interactions between internal stakeholders as players, such as the game between a manager trying to increase worker efficiency and workers who may try to reduce it. Outside a firm, game theory can model competitive interactions, such as two firms deciding whether to spend on advertising. Game theory seeks equilibrium strategies where no player can improve their outcome by changing their strategy alone.

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    Quantitative Manangement and Decision Making

    Uploaded by

    Vaibhav Rakheja
    14 views11 pages
    This document discusses the application of game theory in business model development and decision making. It provides an example of how game theory can be used both inside and outside of a firm. Inside a firm, game theory models the interactions between internal stakeholders as players, such as the game between a manager trying to increase worker efficiency and workers who may try to reduce it. Outside a firm, game theory can model competitive interactions, such as two firms deciding whether to spend on advertising. Game theory seeks equilibrium strategies where no player can improve their outcome by changing their strategy alone.

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    This document discusses the application of game theory in business model development and decision making. It provides an example of how game theory can be used both inside and outside of a firm. Inside a firm, game theory models the interactions between internal stakeholders as players, such as the game between a manager trying to increase worker efficiency and workers who may try to reduce it. Outside a firm, game theory can model competitive interactions, such as two firms deciding whether to spend on advertising. Game theory seeks equilibrium strategies where no player can improve their outcome by changing their strategy alone.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    14 views11 pages

    Quantitative Manangement and Decision Making

    Uploaded by

    Vaibhav Rakheja
    This document discusses the application of game theory in business model development and decision making. It provides an example of how game theory can be used both inside and outside of a firm. Inside a firm, game theory models the interactions between internal stakeholders as players, such as the game between a manager trying to increase worker efficiency and workers who may try to reduce it. Outside a firm, game theory can model competitive interactions, such as two firms deciding whether to spend on advertising. Game theory seeks equilibrium strategies where no player can improve their outcome by changing their strategy alone.

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    of 11

    QUANTITATIVE

    MANANGEMENT AND
    DECISION MAKING
    SUBMITTED TO:- PROF. KALYAN SAMADDAR
    SUBMITTED BY:-ABHISHEK DINGAR(19609020)
    ASHWANI PRATAP SINGH(19609059)
    VAIBHAV RAKHEJA(19609039)
    CHIRAG GUPTA(19609045)
    SHASHANK SINGH(19609034)
    MAYANK SHARMA(19609011)
    Application of Game Theory in
    Business Model Development!
    •The application of game theory helps to develop
    business models to manage interactions of decision
    makers either in a scenario of cooperative or competitive
    approaches to behavior for conflict resolution.
    •A conflict occurs when paths are crossed. It means when
    one decision making entity perceives the influence of
    other actions on its achievement.
    •When there is a conflict of interest, it is generally
    resolved through cooperative or competitive styles. A
    collaborative method is a win-win approach for a
    problem-solving while; competitive style is a win-lose
    way
    The application of game theory outside of a firm – An
    Example

    The application of game theory outside of a firm –


    An Example
    The diagram above shows a simple matrix containing various sets of strategies.
    A set includes two approaches, one from you (in black) and the other by your
    competitor (in blue). While other factors are assumed constant and negligible,
    suppose both you and your only competitor decide to spend money on
    advertisement campaigns. This results, in relatively modest payoffs of $400,000
    for each (see the payoff pattern 4, 4).
    Such a set of decision strategy is known as Nash Equilibrium which implies
    neither entity can improve its profit, by changing its approach alone involving
    an interdependence of actions. Jon Forbes Nash explained this concept in the
    1950s. Furthermore, it’s visible in the famous Prisoners’ Dilemma.
    As another possible strategic measure, you and your competitor do not decide to
    advertise, get a payoff of $600,000 (see pattern 6, 6). Remember that in some
    situations, no advertisement policy may result in reduced expenses, and that’s
    why more profit.
    In the case, when, either you or your competitor alone decide to advertise, earn
    $500,000 payoff on it. If you don’t promote, you have to bear a loss of -$500,000,
    assuming your competitor utilizes your decision consequence as his/her
    opportunity (see the pattern -5, 5). In the very same way, if you advertise but
    your competitor does not, he/she has to suffer a loss of -$500,000 (see pattern 5,
    -5).
    The application of game theory inside a
    firm – An Example
    For a layperson, the initial concept of the game theory
    might look like just as a strategic tool to boost the
    competitive abilities of a firm against its competitors
    only. You can apply it successfully inside a firm, in the
    perspective of considering various internal
    stakeholders of a firm as players. One playing against
    another!
    Here is an exciting example of an application of game
    theory where two internal entities of a firm “playing”
    the game against each other. Remember, the purpose
    of each player is to “win” against the other. The
    strategies adoption to bring down the rival player is
    purely motivated because of a simple fact if one wins
    the other loses; (nobody wants to lose).
    Let’s get back to the example.
    We have two players in this game: Player A, a manager, and player B, workers. The
    manager’s objective is to increase workers efficiency. His gain lies in the better
    productivity of the workers. On the other hand, workers “gain” is in reduced ability
    assuming a lower efficiency level benefits them.
    The manager wants to make workers more efficient without monitoring them because
    it incurs a cost as well as it’s a necessary evil. However, the workers perceive monitoring
    threat as it compels them to work more along knowing, it’s also a weakness of the
    manager due to its extra costs.
    The probability of opting monitoring depends upon the “gains” of workers in the form
    of reduced efficiency. In the same way, the likelihood of reduced effectiveness depends
    on how much it costs to the manager to monitor the workers. When workers gains or
    their monitoring cost are higher, the probability of reduced efficiency will increase as
    well. The game begins!
    The possible results can be in the following four situations of:
    Win-Win
    Win-Lose
    Lose-Win
    Lose-Lose
    In the case of no Monitoring
    If the manager does not monitor and workers
    reduce efficiency, manager get -2 and workers
    gains by +8. This is win situation for the player B
    i.e. the workers and a loss for the manager.
    Suppose workers remain efficient even without
    monitoring, their gain reduce to +4 from +8. Don’t
    confuse yourself here by thinking, why the heck
    they remained efficient without monitoring. Take
    it just as a possibility (even if there is 0.000001%
    chance of such occurrence). It’s a lose situation
    for the workers and a winning for the manager.
    In the case of Monitoring:
    If the manager monitors but still workers don’t perform well,
    he faces a colossal loss as he has not only suffered monitoring
    cost, but also the reduced efficiency of the workers expressed
    as -8 for manager and 0 for workers.
    The win-win situation lies in +4, +4. The manager monitors
    and the workers perform their duties well.
    The effective Application of game theory concepts

    You can use its concepts to develop effective and optimal


    competitive strategies for setting your product/service prices,
    the level of product quantity and quality, capital budgeting,
    auctioning, public policy making, research and development,
    cost management and advertising.
    How can you develop game theory
    approaches?
    First, what you need is to:
    Asses the magnitude of the problem i.e. the cost-benefit
    aspect of the solution of a particular problem. If it’s
    worth bothering about
    Then…
    Recognize your specific business type i.e. a production
    firm, consultancy, real estate etc. along the area of
    application i.e. inside or outside of organization. The
    purpose is to avoid wandering in the vast subject of the
    game theory and shooting the bulls’ eye for time and
    money saving.
    THANKYOU

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