Application Of Game Theory In Strategic Formulation Marketing Essay

diligence Of jeopardize conjecture In Strategic Formulation Marketing stressThis particular article talks about the application of post system in the business world. In todays mettlesomely combative foodstuff it has frame harder and more(prenominal) complicated to square up about the charge strategies and bud bum abouting of the advertisements. This article apologises the fancy of plot of ground dodging with various examples.Key rowing system, pay offs, pris integrityrs dilemma.IntroductionGame theory, a branch ofapplied mathematicsthat is utilise in thesocial sciences, most nonably ineconomics, biology, engineering, political science,international relations,computer science, andphilosophy attempts to mathematic wholey capture behavior in strategic situations orgames, in which an individuals winner in making choices depends on the choices of separates. While initially developed to tumble competitions in which unrivalled individual does better at an differen ts expense (zero unification games), it has been expanded to treat a wide class of inter treats, which argon categorize according to severalcriteria. Today game theory is widely used in the business for solving situations in which thither are a number of shammers.Companies are using the science of Game Theory to uphold them make complicated strategic decisions in this highly war-ridden securities industry with least contingent risk. History of Modern Game Theory is more than 50 course of instructions old and has demonstrated anability togenerate the holy person strategicchoice in a variety of different situations, companies and industries. Principles of game theory are applied through the use of strategy games.Game theory and its applicationsA powerful tool for call offing outcomes of a group of interactingfirms where an action of a singlefirm directly affects the payoff of other active histrions.Enablesa comp bothto formulate their optimal strategy.Ideal for strategic situations where competitive or individual behaviors can be modeled.For exampleAuctions (sealed project bids),dicker activities (union management negotiations),Product decisions (entry or exit markets),Principal-agent decisions (compensation negotiations, supplier incentives) andSupply compass design (capacity management, build vs. out source decisions).Multiple strategy games are analyses tomodel different competitors, various payoffsand potential strategies. The objective of these games is to deliverA recommended set of strategicdecisions to guide competitive behavior to a suited outcome, andAn analysis of how a series of practical strategic give-up the ghosts can predict various competitive outcomes.Various types of games can be used and analysed ground on the strategic situation, the number of players, the amount ofinformation availableand the clipping constraints.Classification of game theoryThere are basically triad types of gamesFully co- operative game to explain th is game we can military issue the example of twain cyclists coming towards each other. it is in their surmount fire to avoid the collision and If they have to avoid the collision each of them has third strategiesmove rightmove leftmaintain directionThe strategy followed by genius person in this case depends on the other person. As they twain dont want a collision they will heighten their direction based on the obstructers strategy. This type of game is called full co operative game.Zero sum non co operative game to explain this case we can take the example of the retail outlets in one locality. All of them use different determine strategy to attract customer. in this case if store is able to attract customers it is on the account of the other retail store. In this particular case a strategy followed by one player affects the other player always. In simple words the win of one person comes on the account of other persons loss. mingled strategy game this type of game explai ns the situation where the interests of both the player are interdependent. But they are partly opposed and partly coincident. This kindly of strategy is followed mostly in the case of union management feuds. In the case of union and the management their benefits are interrelated. At the same time they have conflicting interests as well.Other classification game theory has been divided into following categoriesStatic games this basically deals with anticipating rivals move. These kind of games involve pricing strategy, prisoners dilemma, the concept of dominant strategy, fixing up of advertisement budget and so onDynamic games deals with the concept of perfect and sub perfect games.Prisoners dilemma at a start out place given diagram depicts the prisoner dilemma.Figure 3 Prisoners dilemmaPrisoners dilemma is a beauteous concept of game theory that explains various complications that firms boldness while taking the decision regarding fixing the price or on deciding on the budge t for the advertisement. The evidence available with police is not sufficient generous to convict these criminals to convict. Though they are supposed to get 20 years of imprisonment if the crime is proved, they will get however one year of imprisonment if the crime is not proved. if they apply the best strategy they both can avoid the conviction. The strategies that they can follow areA confesses B corpse silent A gets an imprisonment of 5 years and B gets an imprisonment of 20 years.B confesses A remains silent B gets an imprisonment of 5 years and A of 20 years. two of them confess both get an imprisonment of 5 years.Both remain silent both get an imprisonment of 1 year.The dilemma here is that they dont know about each others strategy and they end up confessing the crime as both of them want to avoid the 20 year of imprisonment. But if they know about the strategy of the opponent they can decide about their strategy and can get best equilibrium possible that is one year for bo th of them. The same theory applies for many firms in the corporate world and they end up choosing the wrong strategy because of the opponent or the apprehensions in their mind.The Concept of Dominant Strategy Dominant strategy is the strategy followed by any player that will supersede all the strategies followed by the opponent.Eliminating Dominant StrategyIt will in the best of interests of both the rivals to eliminate the dominant strategy. One beautiful example of this is the OPEC.Nash Equilibrium A Nash equilibrium is a combination of strategies such that no individual player can deviate unilaterally from his or her to improve his pay offs. some examples of game theory in the practical corporate world expense wars this can be explained by the following example imagine there are two pizza providers in the city and they have different pricing policies namely- high, low and medium. There are two restaurants in a small town, pizza hut and dominos.They are in competition with each other for customers. They have three price slabs high (H), medium (M) or low (L). The customer base is 1,000 of which 300 only ever pervert at Dominos and 300 only buy at pizza hut. The other 400 are price-sensitive and always buy the cheaper pizza and spot at random if they charge the same price. Both providers make a margin of 12 per pizza if they charge high prices, 10 per pizza if they charge medium prices, and 5 for low prices. Both Dominos and pizza hut cannot guess what the other player has chosen before they hold themselves. We can calculate profits by multiplying the number of customers with the margin per customer. For example, if dominos charges a medium price and pizza hut a high price, Dominos will sell to his 300 faithful customers and the 400 price sensitive customers at a margin of 10 each, giving him pay-offs of 7,000. Pizza hut only sells to his 300 loyal customers, but at a margin of 12 per pizza, giving him profits of 3,600.Figure 2 pricing war betwixt two s uppliersPgIn this case three equilibrium arises one of 6/6 , 5/5 other one of 2.5/2.5. the august picture for both the firms is 6/6 but becausee of the price wars between them none of them are able to extractadNo adAd warsNo ad$5mcolgate$5,m$5.5m,$2mAd$2m$5.5m$2.5m$2.5mFigure 3 advertizing war between P G and ColgateThis particular situation is of the two brands of toothpastes in which both of them follow different ad strategies. The decision of waiver for an ad and not going for an ad depends upon the opponent. They have four possible strategiesBoth of them go for adNone of them go for adP G goes for ad but colgate does not go for adColgate goes for ad but P G not.In two cases the equilibrium exists one for 5,5, and the other for 2.5, 2.5. the firms can make more money without going for any ad but as both the firms want to capture the non loyal market they go for ads and finally end up by lower margins. The dilemma here is that if one firm does not go for the ad and the other g oes, then it will lose money. So guessing rivals move becomes very important here.AssumptionsPlayers and rational and they select strategies based on their interest.The market is equally divided in the players.Other factors are constant.Shortcomings of Game TheoryGame theory has many short comings as well and that needfully to be considered.Assumes the players are rational and they play in their self-interest.This might not be the case all the time.Assumes players act strategically and consider the competitive responses of their actions. But every manager does not think within a strategic context.The concept of Game Theory is most effective when managers assure the expected outcomes of the strategies they are following and the strategy that their competitors will follow.To be niggling precise most of the companies often do not have enough knowledge of their own payoffs let alone those of theircompetition.Despiteits shortcomings, a powerful constructed game can perceptibly reduce business risk, can set up valuable competitive insights, improve internal alignmentaround decisionsand increase strategic utility.According to theThe Economistmagazine Managers have much to nail from game theory provided they use it to clarify their thinking, not as a substitute for business experience.ConclusionGame theory is a beautiful concept of applied mathematics. Though it has got shortcomings and its assumptions might not be applicable in all the cases it can help firms and industries in finding the enamour strategies. Based on the pay offs, number of players and other strategic situations game theory can be helpful in developing the optimum strategies for the firms..