Game Theory

Summarized by Sam Mishra, MBA (MIT Sloan)

A firm's business decision is often affected by the moves made by its competitors. In other words, if the firm believes that its competitors are rational and act to maximize their own profits, the firm has to take this into account while making its own profit-maximizing decisions. In many ways, strategic decision making is all about anticipating the competitors' moves in the marketplace, and executing accordingly.

The advent of blog sites and other web 2.0 technologies on the Internet requires businesses to be even more stringent in terms of enforcing NDAs (non-disclosure agreements) signed by various stake-holders: third-party contractors, employees, and even board-members in case of fledgling start-ups.

Let's take the hypothetical case of a great product company, which prides itself as the most innovative product firm in the world. Part of its product and business strategy is to routinely surprise the markets with new products, and  it succeeds in keeping the competitors guessing what it will roll out next. However, it has some employees who are so proud / happy / delighted / ecstatic to be working on these cutting edge products that they go and blurt out the cool products they are working on, on some blog site. What happens to their employer? The employer loses its competitive advantage, in a nut-shell.


The main theories / strategies within Game Theory are the following:

Nash Equilibrium

These strategies are an outgrowth of pioneering work by the famous mathematician John Nash in the 1950s. This is a set of strategies such that each firm is doing the best it can given the action of its competitors.

Dominant Strategy

This is a strategy that is optimal for a firm regardless of what its competitors do.

Maximin Strategy

This is a strategy that maximizes the minimum gains that can be earned by the firm.

Tit-for-Tat Strategy

This is a strategy  where the firm attempts to reach a cooperative outcome through sending appropriate signals, and punishes the competitor if the competitor fails to cooperate.

Also see Relational Contracts.