We will be solving practical challenges through MBA concepts. No theory only applications !
A typical pitfall in business and in life is people operate in silos. With time, they get better at identifying their dominant strategies but fail miserably because they don't keep an eye on opponent's strategies. Chess players will like this lesson a lot !
This particular lesson is my absolute favorite as I am used to quickly applying game theory in my mind while formulating strategies. Imagine you bidding for upcoming project and there are two players involved including you. This lesson from managerial economics comes handy when you don't know how to proceed ahead. Guess, you aren't a monopoly like Microsoft once used to be :p
The famous game theory 2 by 2 matrix is shown below. In this scenario, the values in cells represent payoff/revenue when you charge market pricing i.e. "cooperate" or undercut price i.e. "defect" to get more market share. Sample firms used here are Carlberg and Kingfisher.
Now, let me explain how to read the above table. Carlsberg has two options: either cooperate or defect w.r.t deciding pricing and so does Kingfisher. Operating in silos, both would want to "defect i.e. undercut". Both firms will imagine getting payoff of 20 because they are not keeping an eye on each other's move.
However following above, they would end at (bottom most right quadrant) lowest payoffs of 12 each because of defecting.
Once bitten twice shy, both firms would now want to cooperate and get lesser nonetheless not worst payoff of 16 for each (top most left cell). But the fear of other party cheating would always tend them to cheat and this my friends is classic prisoner's dilemma.
The professional take-away is to always quickly draw your game theory matrix and understand the other's moves. However for me the personal takeaway supersedes above anything else. Game theory teaches to cooperate than compete as it leads to net higher payoff for both players. It's a way of life which is focused on long term strategy rather than taking price cuts in telecom where no one gains in the end. Cooperation strategy helps in making more friends than foes. I'm writing and focusing more on this as we have such huge strength yet a con of population in India. The modus operandi becomes a dog eat dog world. Cooperation as a way of life may be a slow transition but it's worth thinking.
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