Game Theory

Chess is often considered to be a game of strategy. Prior to making any move, a good chess player will try to anticipate their opponent’s possible counter-move and their own counter counter-move in response. How does one anticipate the reaction of your opponent or competitor? There are several tools available – game theory, behavioral psychology and history among others. Game theory attempts to model a contested situation and assumes that people will act strategically and reason logically. In other words, people are expected to logically analyze the best way to achieve their objectives, given that their competitors or opponents are doing the same. In the real world, people frequently do not respond rationally and behavioral psychology can often provide insight regarding anticipated outcomes. Finally, searching for an analogous situation that has happened in the past and studying the outcome is often useful for handling similar situations today.

Let’s see how game theory can be used in strategic thinking.

Suppose you have two business monthly’s in the same town competing for readers and suppose that the readership has a slight bias in favor of the first publication. When the two publications have the same cover story, 60% of the potential buyers who like that story will pick publication A and 40% will pick publication B. There are two prominent stories that could be run next month. The first is on a local success story, which would interest about 30% of the readers, and the second is about changing economic conditions that would interest about 70% of the readers. Which publication should run which story to attract the most readership? This is a problem suitable for game theory, since it is likely that both publications would reason logically and act in their own best interests.

Publication A has what is called a dominant strategy. A dominant strategy is one that makes a player better off than he would be if he used any other strategy, no matter what strategy his competitor uses. The editors of publication B should be able to figure out that publication A will go with the story on the economy and they will earn more readers if they run with the local story rather than compete for a portion of the economy readership.

We can understand this logic more easily with a simple table. We show two columns corresponding to publication’s B choices and two rows corresponding to publication’s A choices. This produces four boxes, each box corresponding to one combination of strategies.



Let’s look at sales for publication A, which are in red. Notice that it is irrelevant what story publication B runs with. Publication A always does better with the story on the economy. It has a dominant strategy. Examine the sales for publication B, which are in blue. If publication A chooses the economy story, publication B would be better off with the local interest story 30 to 28. If publication A chooses the local interest story, publication B would be better off with the economy story 70 to 12. Game theory involves looking forward and reasoning backward to formulate the best strategy. Since we know it is in the best interest of publication A to run with the economy story, we conclude that publication B should run the local interest story.