The Game Theory
Principles
The theory aims to provide a methodic approach to the process of decision making in business or an organization. It is mostly applied when organizations have contradictory ideas, views or objectives. For instance, when two warring nations try to settle their dispute, each country will want the difference resolved in its favour during negotiations or peace meetings. Under such circumstances, the game theory can be used to arrive at a common ground. The method can also be applied in evaluating economic behaviours, political or legal strategies. However, the theory relies on the following assumptions or principles to provide appropriate solutions to a problem:
- Players have multiple strategies that they can use to solve a problem.
- The theory assumes that pre-defined outcomes exist
- At the end of the game, zero will be the outcome for players in the game
- All players are familiar with the outcomes of the game and the game rules
- Players will make decisions rationally to improve their profits
How the Game Theory Supports Corporate Strategy
Yes, the theory supports corporate strategy. It is used in business to analyze oligopolistic economic environments. For instance, competing organizations can decide to accept pricing strategies set and accepted by other business organizations, or they can choose to lower their prices. Cooperating with competitors can lead to the realization of common interests, but companies sometimes choose to act out of self-interest, resulting in worse states. The business environment is generally influenced by decision analysis, which forms the basis for contracts.
The Prisoner’s Dilemma
The dilemma – which is the most popular idea of the game theory, is a decision analysis paradox that is applied to situations in which parties in a negotiation process act out of self-interest, resulting in a lack of an optimal solution. The dilemma is designed in such a way that parties protect their self-interest at the expense of the other party’s interests. As a result, the parties end up in a worse state, which could be avoided through cooperated decision-making. It is used to encourage negotiations and cooperation in a decision-making process.