Game theory

Game Theory
Name
Institution

Game Theory
Game theory can help to improve understanding of a company’s competitive external environment. As an interdisciplinary tool that combines aspects of philosophy, mathematics, psychology and other subject areas, game theory offers insight into a range of behavioral relationships to improve logical decision making. This is a useful feature in the business environment, particularly when considering and analyzing the different aspects that characterize a competitive environment. In this case, a compete can use game theory to analyze the pricing and distribution structures of competing companies within the same industry thereby allowing it to introduce a price that would offer a competitive advantage. The same strategy can be used for all measures of competition. For that matter, game theory can introduce a logical thought process that allows the company to achieve greater gain by being contrary to the common interest that would be achieved by working together with the competition. In essence, game theory offers a hypothetical framework of the competitive external environment along with material implications for each decision option that the company can make. For instance, a soda company that seeks to expand its geographical reach will consistently face decisions concerning whether to build new distribution networks in the expansion region, or contract a distributor, or maintain the status quo. The first two decisions can allow the company to gain a competitive advantage.

Given that making a decision will entail evaluating many factors and involving a lot of stakeholders, game theory eases the process of decision making by presenting a rational approach (Maschler, Solan & Zamir, 2013; Myerson, 1991; Tadelis, 2013). In this respect, game theory can help in better understanding a company’s competitive external environment by providing a rational basis for integrating and analyzing a lot of information from different sources through insight on behavioral relationships.
References
Maschler, M., Solan, E. & Zamir, S. (2013). Game Theory. Cambridge: Cambridge University Press.
Myerson, R. B. (1991). Game Theory: Analysis of conflict. Cambridge, MA: Harvard University Press.
Tadelis, S. (2013). Game Theory: An introduction. Princeton, NJ: Princeton University Press.