Download Game Theory and its Effects on Business Sustainability

Game Theory and its Effects on Business Sustainability
By Ralindu Echetebu
Technical Writing Course
Professor R. Aguirre
March 23, 2017
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“Game Theory and its Effects on Business Sustainability."
INTRODUCTION
“Game Theory” is the procedure of modeling the premeditated interface between players
in a state containing rules and results. As far it is used in different disciplines, game theory is
particularly a tool in economics study. For the past century, many of the world's most powerful
and innovative minds have cumulatively worked on refining our understanding of Game Theory.
In the early to mid-century, such minds included names like James Waldegrave, John von
Neumann, John Nash and Merrill Flood. But recently, more great minds continue to advance the
scope of which Game Theory comprises (Duronio 1). It has five major classes: Simultaneous and
Sequential Move Games, Symmetric and Non-Symmetric Games, Normal Form and Extensive
Form Games, Constant Sum, Non-Zero Sum, and Zero Sum Games Cooperative and NonCooperative Games.
STATEMENT OF PROBLEM
Game theory was at some point considered innovative interdisciplinary occurrence that
brought together mathematics, psychology as well as philosophy and a far-reaching mix of other
academic areas. Eight Nobel Prizes have been conferred that have significantly advanced the
discipline; but further than the educational level, is game theory appropriate in the current world?
OBJECTIVE
My objective is to highlight the importance of these negotiation principles by providing
real world business applications as examples. If more businesses adopt such problem-solving
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doctrines as default measures, more viable agreements can be reached and most importantly
maintained. One possible solution to the problem is to promote public education on the
principles of Game Theory, and the advantages and disadvantages of its subtypes such as NonZero Sum solutions. I believe that if one simply learns these basic principles, they can apply
them to their daily internal and external business decision making.
PROCEDURE
To assess the feasibility of a business market adopting more Non-Zero Sum practices, I
plan to address and give examples of the five most commonly applied game theories. Through
my research, I will concentrate more on the types of Constant Sum, Zero Sum and Non-Zero
Sum strategies and how they affect business sustainability in today’s markets. I also plan to
conduct a few interviews with current business owners, an international business attorney located
in New Zealand and a financial executive at Engie Suez Energy-Houston to gain a better
understanding of real world applications.
The conventional instance of game theory in global trade arises if assessing economic
phenomenon by an oligopoly (an economic condition in which there are few suppliers of a
product that one supplier's actions can have a significant impact on prices and its competitors).
Competing companies are faced with a choice to approve fundamental price framework agreed
on by other firms, or initiate their lower price program. However, it is the common interest desire
to coordinate with rivals that lead them to loss of revenue. As an outcome, each one is worse off.
In this basic practical scenario, decision evaluation affected the overall business atmosphere and
is a major aspect of the use of agreements.
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Game theory has deviated to include other business subjects, including waging war
decisions, effective marketing campaign strategies, voting styles, and perfect auction. For
instance, pharmaceutical firms constantly face choices concerning whether to market the product
instantly and get a competitive advantage over their competitors or to extend the testing duration
of the medicine (Duronio 3). If an insolvent firm is being settled and its assets auctioned, game
theory offers a basis for rational decision making.
Simultaneous and Sequential Games
A sequential game is where players choose an action before the other players select
theirs. Significantly, the other players should have facts of their initial choice of move, or else
the dissimilarity in time will not have a strategic effect (Strategy Ch 3 Strategy Games 13).
Sequential games are therefore controlled by time and are displayed in the model of decision
trees. Simultaneous games, on the other hand, don't have time axis because players decided their
moves without being certain of the other players’ moves and are normally displayed in the model
of payoff matrices (Kübler and Wieland 1437).
Examples of Sequential and Simultaneous Game Theory
Extensive form game representations are normally used for sequential games because
they directly explain the aspects of the sequential game. Sequential games are also known as
combinatorial games. True games like Chess, Go and Backgammon are normal sequential
games. The magnitude of decision trees can differ due to the complexity of the game, ranging
from exhaustive and small game tree to the huge multifaceted game tree of chess (Kübler and
Wieland 1439).
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The figure below illustrates how firms use sequential and simultaneous games in
their firms. (Strategy Ch 3 Strategy Games 5)
ACCOMODATE
£100,000 TO BETTERBOOT
£100,000 TO SKIFINE
SKIFINE
ENTER
BETTERBOOT
-£200,000 TO BETTERBOOT
-£100,000 TO SKIFINE
FIGHTS
PRICE WAR
KEEP OUT
£0 TO BETTERBOOT
£300,000 TO SKIFINE
(Figure 1) A sequential and simultaneous move game
The participators in the game are two companies: Top Value and Price Rite. Every
company should make a decision concerning the price at which it sells its manufactured goods.
To simplify things, it is suggested that each company has a simple dual option: it can reduce its
price or maintain it. The game theory is played on one occasion. The essentials of this game can
be signified in the normal form.
As every firm has two different designs accessible to it, there are four potential strategies
of configurations, indicated by the connections of the column and row stratagem in the matrix.
The numbers in the pair represent the proceeds that each company receives for a specific choice
of an alternative.
A 2-player game on price (Strategy Ch 3 Strategy Games 7).
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Stick
Cut
Stick
1,4
3,3
Cut
2,2
4,1
Top Value
Price Rite
(Figure 2) The Matrix for Top Value and Price Rite
Nash Equilibrium
Stick
Cut
Stick
1,4
3,3
Cut
2,2
4,1
Top Value
Price Rite
(Figure 3) Nash Equilibrium
A set of strategic alternatives is a Nash equilibrium if every player is doing the best
possible as compared to what other person is doing. In another way, neither a company will
benefit by opposing independently from the result, and so would not unilaterally change its plan
given a chance to do so. Nash Equilibrium is a solution idea. Secondly, the result is inefficient.
Both companies could do exemplary if they chose to Stick (where the revenue to each company
would be three instead of 2).
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This situation occurs because there are two facets to the answer. Firstly, the game has been
played non-cooperatively. Secondly, the profits help to determine the structure of inducements
facing the companies. Therefore, the inducements are not favorable to the option of Stick and can
be critical to the results of a game. The payoff matrix in Figure 3 is a model of a Prisoners’
Dilemma game. This is the name given to all games in which the rankings of payoffs are as
indicated in Figure 3.
In the game of Prisoners' Dilemma, there is a single Nash equilibrium (the result outlined
in bold in Figure 3). This Nash equilibrium is as well the leading strategy for every player.
Furthermore, the profits to both players in the main stratagem Nash equilibrium are poor as
compared to those which would lead to selecting their option (dominated) stratagem. As it can be
seen, not all games have this payoff structure. Though, numerous business problems appear to be
illustrations of Prisoners’ Dilemma games.
Cooperative and Non-Cooperative Games
The non- cooperative game is a game that involves competition among players and in
which self-enforcing competition known as coalitions are possible because of lack of external
means to reinforce the cooperative behavior. Non-cooperative games are usually examined by
the process of the non-cooperative model which attempts to predict the individual payoffs and
strategies to find equilibrium. It is different from the cooperative game theory that concentrates
on forecasting which coalitions will form the combined activities. It does not talk about actions
that groups take as well as the resulting payoff, nor does it assess the strategic haggling that takes
place in the coalition, nor influences the allocation of payoffs among members of a similar
coalition (Fisher, Bruce and William 1).
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The non-cooperative game offers a low-level method because it fabricates all the
systematic details of the game, while cooperative game only defines the payoffs, strategies, and
structures of the coalitions. Since the non-cooperative game idea is universal, cooperative games
can be evaluated through the technique of non-cooperative game hypothesis provided that
adequate presumptions are prepared to include all potential policies accessible to players because
of the likelihood of outside enforcement of collaboration. Although it might be ideal to express
all games under a non-cooperative structure, instances abound in which inaccessibility of
adequate information precludes modeling of perfect official process accessible to the company
during premeditated haggling procedure. In such scenarios, the cooperative game theory offers
basic method authorities (Fisher, Bruce and William 1).
The cooperative and non-cooperative game focuses on economic circumstances linking
interactive decision making with perhaps differing interests. In strategic or competitive
circumstances decision makers act autonomously without contracting each other’s real behavior.
Promises could not be kept as any coordination could be self-enforcing. Hence, personal
incentives play a significant role. Non-cooperative or strategic game theory offers a structure that
helps to examine decision situations. Applications of this theory comprise auction theory,
negotiations on global treaties, interaction networks, collective behavior and strategic voting. In
cooperative circumstances enforceable compulsory contracts among the decision makers are
feasible. In such circumstances, the major subject is to get a rational allocation of the joint
incomes from cooperation. Such distribution problems can be modeled by cooperative games.
Applications comprise tribulations of cost, distribution of insolvency shortages, optimal
assignment, water allocation, as well as corresponding opportunities. The cooperative game
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theory also offers constructive techniques to solve tribulations in social choice, network theory as
well as multi-criteria examination (Fisher, Bruce and William 1).
Examples in Non-Cooperative and Cooperative Game Theory
Dominant strategies
One significant idea which is extensively used in finding clarifications of noncooperative games is the concept of leading strategy. A company has the main stratagem if it has
a single strategy that gives higher profits as compared to any other company regardless of the
decision made by the other company. Dixit and Nalebuff state this principle: "If the company
has an overriding stratagem, it should use it (Strategy Ch 3 Strategy Games )."
Cooperative Game Theory and its Sustainability
This game could be imagined by being played as a profit-maximizing cartel. Assuming
that companies cooperated, making their selection mutual instead of separate. Will this change
the result of the game? The response is yes. If all companies decided to stick, the payoffs of
every company would be three instead of 2. But there is a challenge, can the compensation be
maintained? If self-interest manages conduct, then the answer is no. Every company has
incentives to abandon the contract and to change its strategy immediately after it has been
attained. Assuming the two companies had made an agreement to maintain the price, and observe
the enticements of Y and X has stated that it will not reduce the price, company Y can get the
benefit by deserting the agreement, leaving X to stick as decided other than reducing the price.
That means company Y could get proceed of 4.
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Extensive and Normal Form from Game Theory
Normal form
The normal form is considered to be a depiction of the game. It is represented in the
form of a matrix rather than a graphical form. Whereas this method can be used in determining
subjugated strategies, some information gets lost when using extensive form representation (Roth
and Ido Erev 167). The normal-form model of the game comprises of all conceivable and
perceptible strategies as well as their equivalent payoffs for every player. In static games of
perfect, complete information, a normal form game representation is a specification of players’
plan spaces as well as payoff functions. A strategy/plan space is believed to be the set of
strategies accessible to the player, while strategy is the whole plan of action for each phase of the
game, whether or not that phrase occurs in the play. A payoff function is mapping from the
cross-commodity of strategy spaces for players to the player's payoffs (usually the actual
numbers, where the number stands for ordinal or cardinal utility (Raiffa 23).
Uses of normal-form
The payoff matrix helps to facilitate the elimination of dominated strategies, and it is
normally used to explain this theory. For instance, in prisoner dilemma, it is possible to see that
every prisoner can defect or cooperate. If one of the prisoner defects, he or she gets off
effortlessly while the other prisoner is locked in the cell for a longer period. But if they both
defect, they will be kept for a short period. One can identify that cooperation is strictly
subjugated by the defect. One should compare the first digits; this means that 0 > −1 and −2 >
−5. This indicates that no matter what column a player picks, the player on the row does well by
picking defect. Likewise, the player compares the 2nd payoff in every row again 0 > −1 and −2 >
−5 (Strategy Ch 3 Strategy Games 5). This indicates that no matter what player in the row does,
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the player in the column does well by picking defect. This signifies the exceptional Nash
equilibrium of the game. (Roth and Ido Erev 169).
Extensive-form game
An extensive-form permits direct demonstration of various features like the sequencing
of players' possible actions, their decisions at each point, the information every player has
concerning the moves of the other players when he or she decides, on his payoffs for all potential
game results. Extensive-form likewise allows representation of imperfect information in forms of
possibility encoded as moves by nature.
Zero-sum game
This significant concept derives from the initial ideas demonstrated in the game theory
and stipulates that experimental benefits gained by the single party are equivalent to the losses of
the other party (Norton and Samuel 215). Options, swaps, forwards, as well as other monetary
instruments, are normally defined as zero-sum apparatus. In economic theory and game theory, a
zero-sum game is considered to be an arithmetical representation of a circumstance in which
every participant's failure or achievement is accurately equated to the gains or losses of the other
participants (Norton and Samuel 215). In other words, game theory is an event where one
individual's gain is equal to other's loss, so the benefit or wealth is zero. A zero-sum game can
have two or more players. If the entire losses are subtracted, and the entire gains of the
participants added, they will add to zero. Therefore, cutting a cake where taking big piece
decreases the amount of available cake for other people is a zero sum game if the participants
value every cake.
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In Game Theory, zero-sum games are less common that non-zero sum games. Gambling
and poker are famous examples of zero-sum games because the addition of amounts won by
many players equals the joint losses of the other people (Norton and Samuel 215). Games such
as tennis and chess, where there are one loser and one winner, likewise zero-sum games. In the
financial markets, futures and options are illustrations of zero-sum games, apart from business
costs. For each who gains on a contract, there is an opposite-party who gets loses.
Matching pennies is the game normally quoted as an illustration of a zero-sum game. The
game encompasses two different players, M and N concurrently putting a penny on the table.
The payoff relies on if pennies do not equal or equal. If all pennies tails or heads, player N wins
and maintain player M’s penny, in case they do not equal, player N wins and earns contestant
M’s penny (Norton and Samuel 216).
Zero-sum games are different from triumph-win circumstances – like trade agreements
that drastically upsurges business among two countries – or lose-lose circumstances, such as war
for example. In real-life, nevertheless, things are not constant, so losses and gains are normally
hard to measure.
A fallacy held by some people is that the stockpile market is a zero-sum game. However,
that is not true, since business people may offer share prices down or up depending on many
factors like the economic attitude, profit forecasts as well as evaluations, without one share
shifting hands (Norton and Samuel 215). Eventually, the stock market is inextricably connected
to the actual financial system, and both are dominant tools of affluence instead of zero-sum
games.
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Zero-Sum Game & Economics
In Economics, Zero-sum game presumes a perfect description information and perfect
competition, which means both challenges in the paradigm, have all pertinent information to
make a well-versed decision. Broadly speaking, many trades or transactions or trades are
intrinsically non-zero sum games since when the two parties agree to trade they so with the clear
understanding that services and goods they are receiving are more significant than services and
goods they are trading for it’s after the cost of transactions (Norton and Samuel 215). This is
termed as positive-sum, and many transactions fall under this class.
Futures and options trading is the closest sensible pattern to the zero-sum game situation.
Futures and options are necessary well-versed bets on what the projected price of a specific
product will be in a strictly bound time. With futures and options, if the price of that product
increases within that bound time, the investor can sell the futures at proceeds. Therefore, if the
shareholder makes cash from that bet, then there will be an equivalent loss (Weiser 43). This is
the reason options, and future trading normally comes with stipulation not to be undertaken by
inexperienced traders. But, options and futures offer liquidity for the subsequent markets and can
be very successful for the correct company or investor. It is important to note that the stock
market is normally considered to be a zero-sum game, which is a fallacy.
Traditionally, and in modern society, the stock market is frequently associated with
betting, which is absolutely a zero-sum game. If a businessperson purchases a stockpile, it is an
allocation of possession of a corporation that allows that shareholder to a portion of the firm's
proceeds. The price of a stock can increase or decrease regarding the wealth and a multitude of
different aspects, but eventually, possession of that stockpile will ultimately result in a loss or a
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proceed that is not predicated on the assurance or probability of somebody's loss (Norton and
Samuel 215). On the contrary, betting means that someone wins the cash of the other party who
loses it in the game.
Non-Zero Sum
This is a game theory and a situation where single decision maker’s loss or gain does not
manifestly lead to the other decision makers' gain or loss. That means, the losses or winnings of
all players do not lead to zero and everybody can gain: it is known as win-win game.
Non-zero defines a circumstance where the interrelating parties’ aggregate losses and gains and
losses can be more or less than zero (Norton and Samuel 215). A zero-sum game is a firmly
competitive game whereas non-zero sum games can either be non-competitive or competitive.
There is uncertainty in addressing swaps under coercion. Assuming that ‘Trade A’ where
John trades Good A to Kelvin Good B, if the trade does not benefit John adequately, John will
overlook trade X. But if Kelvin uses coercion to make sure that John will swap Good A for Good
B, then this says nothing concerning the original Business X. That means that Business X was
not a positive sum (that is to mean that non-occurring transactions could be zero-sum if Kelvin's
gain of efficacy accidentally balances John’s loss of efficacy (Norton and Samuel 217). What
has occurred is that the current trade has been suggested, Trade Z, where John swaps commodity
A for two different things: commodity B as well as escaping the penalty imposed Kelvin for
rejecting the business. Trade Z is considered to be a positive sum, for the reason that Adam
wanted to do business, he hypothetically has an alternative, but he has identified that his position
is well served in provisionally using force (Hedges 13). Under force, the forced party is acting
appropriately under the regrettable situations, and the swaps they make are positive sum.
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How Non-zero sum game makes businesses sustainable
Non-zero sum games and survivable malware
There are numerous current works in the area of malicious mobile agents and beneficial
mobile agents like Cryptovirus. It is indicated that Cryptovirus is a circulated algorithm, and by
exploiting communal bulletin boards, mix-nets and PKI, novel malware are likely to happen. In
specific, a disbursed Cryptovirus attack forces the victim to play a nonzero game under the
danger of sensitive facts being discovered (Strategy Ch 3 Strategy Games 17). The malware
attack is normally created as Non-Zero Sum game where the regulations are forced by
cryptographic protocols. To solve such problem, the government agencies took the initiative to
counter such attacks using Zero-Sum Game. This is the optimal strategy for the machines which
encompass the extension of the life of payload after the victim is confirmed. This broadens both
decision capability and life of dealing with the virus, hence creating sustainability in the cyber
industry.
Fannie Mae Multifamily Mortgage
For about 25 years, Fannie Mae Multifamily mortgage business has consistently and
successfully offered a reliable, stable as well as market for participants in the housing industry
(Fannie Mae 9). As one of the largest participant in the multifamily mortgage financing, the
business exploits a shared risk business representation that has proved to be profitable, scalable
and sustainable. Fannie Mae experiences favorable performance of its $189 billion multifamily
business. Fannie Mae Multifamily guaranty book of the business is attributable to the DUS
paradigm loss sharing with highly financially and experienced sound counterparties, joined with
the standard of the underwriting guidelines as well as the asset management oversight (Fannie
Mae 13).
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(Figure 4) Alignments of Interest
Conclusion
Business games are seldom made, but if ever made, they occur when decisions are made
at the similar times by appropriate firms. But because it is so, firms should select their
alternatives before their competitors do. Numerous business choices are superlatively examined
as occurring within the structures of concurrent games. That means, the companies think as if all
players should choose a strategy at the same time. Many real games possibly merge elements of
sequential and simultaneous games. In economic theory and game theory, a zero-sum game is
considered to be an arithmetical representation of a circumstance in which every participant's
failure or achievement is accurately equated to the gains or losses of the other participants.
However, numerous economic circumstances are non-zero sum because valuable services and
goods can be created, destroyed, or badly allocated in many ways; and any of those situations
will create a net loss or gain of utility to many business ventures. All businesses are by
description a positive sum because if two parties concur to a swap, every party should consider
the products it is getting to be more precious as compared to goods it is delivering. In truth, all
economic swaps should benefit all parties to the point that every party can overcome its costs of
the transaction, or the transaction will simply not occur.
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Bibilography
Fannie Mae. "the role of risk retention in multifamilyfinance ." 2011.
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Hedges, Kristi, and Work In Progress. "Six Surprising Negotiation Tactics That
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Duronio, Ben. "7 Easy Ways To Use Game Theory To Make Your Life Better."
Business Insider. Business Insider, 04 Apr. 2012. Web. 09 Mar. 2017.
Raiffa, Howard. "The Art & Science of Negotiation." Harvard Law Review 96.4
(1983): 969. Program on Negotiation. Web. 07 Mar. 2017.
Haar, Charles M., and Peter A. Lewis. "Fannie Mae: A Win-Win Solution." The
Washington Post. The Washington Post, 21 June 1996. Web. 13 Mar. 2017.
Weiser, John. Win-Win Strategies: Case Studies. Puerto Rico: Innovations
through Partnership, Apr. 2004. PDF.
Norton, Michael I., and Samuel R. Sommers. "Whites see racism as a zero-sum
game that they are now losing." Perspectives on Psychological Science 6.3 (2011): 215218.
Kübler, Dorothea, and Wieland Müller. "Simultaneous and sequential price
competition in heterogeneous duopoly markets: Experimental evidence." International
Journal of Industrial Organization 20.10 (2002): 1437-1460.
Roth, Alvin E., and Ido Erev. "Learning in extensive-form games: Experimental
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Strategy Ch 3 strategy Games . "Chapter 12: Routes to success: a strategic perspective. ."
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