Game Theory Application for Business Strategy: A Detailed Report

This report analyzes the application of game theory to business strategy, focusing on how firms can compete and position themselves against rivals. It defines game theory as a probabilistic model used for decision-making in competitive scenarios. The report outlines key assumptions, including rational player behavior and strategic awareness, and highlights the benefits of game theory, such as providing objective solutions and aiding in strategic decisions. It presents a payoff matrix example in a duopoly setting to illustrate practical application and emphasizes the importance of considering competitors' actions when making strategic choices. Despite limitations, the report recommends using game theory to improve business performance, offering valuable competitive insights and reducing business risk. The report concludes with a discussion of the benefits and applications of game theory in business strategy, which is critical for companies experiencing difficulties in making the best strategic decisions.

Game Theory 1
GAME THEORY
By (Student’s Name)
Professor’s Name
College
Course
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Game Theory 2
GAME THEORY
Introduction
This paper will describe the application of Game theory to business strategy. From the
article, a business strategy refers to the determination of how a firm in a given business shall
compete as well as position itself among its rivals is an arduous task. It needs a strategic analysis.
Business strategy is crucial in any organization. It is that specific policy created by the
organization by taking into consideration the specific policy the rivals might take. The main
benefit of business strategy is that it gives rise to the profitability of the business. Business
strategy also contains particular policies that might be adopted to attain organizational goals. All
these indicate that business strategy is quite essential for any organization.
On the other hand, Game theory refers to a probabilistic model which remains used in
driving, as well as analyzing rules for making decisions when more than two individuals remain
competing for some objectives. Most of the managers indeed experience a lot of problem in
developing and using the business strategy. The key aim of this paper is to explain how the
manager of XYZ can make its business strategy to be more efficient and effective thru the use of
this concept (game theory). This paper shall look at the assumptions as well as the benefits of the
game theory.
The assumptions which need to be considered when using Game theory include the
following: The first assumption is that all the players think and act rationally, making choices as
well as undertaking actions that remain in their self-interest. This assumption suggests that all
managers understand the expected negative as well as positive payoffs of their actions. The
second assumption is that all the players in the industry act strategically while taking into
account the response of their competitors to their actions. Another assumption is that all the

Game Theory 3
players know the objects of their opponents. The next assumption is that the actual number of
players in this game is two (sequential game). The next assumption is that there remains a
conflict of interest between the rivals. The next assumption is that each rival has a specific
course of action. Lastly there are two competing players in the market.
It is true that the assumptions, as mentioned above, are too constructive and theoretical to
be used in managerial practices. However, the assumptions that players take rational decision to
raise their profit and that all rivals in the game remain aware of the rules of the game as well as
the outcomes of other competitors make the application of this theory to be realistic.
Benefits of Game theory
The game theory brings together different disciplines such as psychology, philosophy and
mathematics. This theory is quite essential to modern decision making and analysis in the
organization. In the real world, Game theory tries to look at the correlations between players in a
specific model and then forecast their optimal decisions. It helps in forecasting outcomes of a
group of the interacting company where an action of one company directly affects the payoff of
the other remaining participating players.
Game theory provides a suitable approach to understanding numerous problems of all
sorts in the company. Increasingly, organizations are using the concept of this theory to assist
them in making decisions (strategic decisions) more so in highly competitive environments as
well as situations. This concept of Game theory has shown an ability to create a perfect strategic
choice in numerous diverse situations to institutions. Theory principles remain leverage via the
use of strategy games. The other benefits of the game theory include: a solution to this theory is
objective. The solution may easily be augmented, eliminated and manipulated. Also, there are
consistencies in solution to this theory (game theory). From the discussion, we can see that the

Game Theory 4
theory allows decision-makers to either accept or reject the hypothesis. Also, this model, when
applied to the organization, it offers a limited representation of reality. Therefore, a solution to
game theory is a representation of the real problem in the organization.
Every methodology used in any organization must indeed have its weaknesses. This
theory also has some limitation which managers need to consider when making strategic
decisions in the organization. For practical considerations, this theory always imposed some
constraints since it remains the only correct method to formulate the problem. Another weakness
is that this theory relied on the assumption that the players are rational as well as few in number..
Data Needed By Game Theory
The data needed by this theory include the following: There must be the data on players
of the game, the actions and information available to every player at each point, as well as
payoffs for every outcome.
Practical Application
This theory is based on the principle that the decision taken by one an organization
impacts numerous organizations that interact with that organization, and vice versa
(Aigbokhaevbolo 2011). The game may be categorized according to the number of strategies.
For instance, A (3X3) game indicates that both the players have three strategies available for
them. All these strategies are linked to payoffs. Aigbokhaevbolo defined payoffs as the actual
amount of money which changes hands when the payers in the market select their respective
strategies.
Figure1: A 3X3 PAYOFF MATRIX: a 3 – players, 3-strategy

Game Theory 5
This table denotes that if B uses strategy j and A uses strategy i, the payoff to B remains a
ij and the payoff to A remains- ajj. This explains why many organizations operate in oligopoly
condition, where changes in the output, pricing, advertising or product police of one firm affects
the sales of other competitors. The other rivals in this same industry are expected to react swiftly
to such changes.
This table shows that when an organization is choosing a strategy or making a decision, it
must take into consideration the potential choices as well as payoffs of other organizations. As a
manager, you must keep in your mind that while making your choices, the other players in the
market are also thinking of the best ways to counter the strategy used by your organization.
Practical Example in Duopoly Setting
Suppose firms C and D sell competing commodities and are deciding whether to carry
out advertising campaigns. The truth is that each organization shall be affected by the decision of
its competitor. The possible outcomes of this game are demonstrated in figure 2 shown below. In
the table, the first number in every cell indicates the payoff to organization C, and the 2nd
number indicates the payoff of organization D. If both organizations decide to advertise
organization C shall make a profit of ten and organization D a profit of five. If organization C
advertises and D does not, organization C shall earn fifteen and organization D zero. Also, the
table shows the results for the other 2 possibilities. So, the question is what strategy each
organization should choose? First of all, consider organization C. Organization C ought to
advertise since no matter what organization D does, organization C does best mainly by
advertising. If organization D advertises C earns ten if it advertises and only six if it does not
advertises. If organization D does not advertise C earns five if it advertises and only ten if it does
not advertises.

Game Theory 6
Advertising is thus the dominant strategy for organization C. The same remains true to
organization D: No matter what organization C does organization D does best in the market by
advertising.
Assuming that both organization C and D are rational, the outcome for this game is that
both organizations shall advertise. This kind of the outcome is called Equilibrium in Dominant
strategies.
Table 2: payoff matrix for an advertising Game
Company D
Advertise Do not advertise
Advertise
Company C
Do not advertise
Despite the shortcoming of the game
theory discussed above, a properly constructed game may discernibly yield valuable competitive
insights, reduce business risk, enhance alignment around decisions as well as maximize strategic
utility. Therefore, I recommend the manager to use game theory to business strategy. This is
because the organization experienced a similar problem in deciding the best strategic decision to
be used to assist in improving the performance of the business in the market. The best method
the organization may use to make its business strategy to be more efficient as well as effective is
thru the use of Game theory.
Conclusion
10.0, 5 15.0, 0
6.0, 8.0 10.0, 2.0

Game Theory 7
This paper has intensively discussed the use of game theory for business strategy. From
this paper, business strategy refers to the determination of how a firm in a given business shall
compete as well as position itself among its rivals. Conversely, game theory refers to a
probabilistic model which remains used in driving, as well as analyzing rules for making
decisions when two individuals remain competing for similar objectives. From this paper, we
observed that game theory remains the best technique to be used in strategic decision making for
companies that experienced challenges in deciding the best strategy that may improve the
performance of the business in the market.
References

Game Theory 8
Aigbokhaevbolo, O., 2011. Application of Game Theory to Business Strategy in Undeveloped
Countries: A Case for Nigeria. Journal of social sciences, 27(1), pp.1-5.
http://www.krepublishers.com/02-Journals/JSS/JSS-27-0-000-11-Web/JSS-27-1-000-11-Abst-
PDF/JSS-27-1-001-11-1165-Aigbokhaevbolo-O/JSS-27-1-001-11-1165-Aigbokhaevbolo-O-
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