The Game Theory is an invention of the mathematicians and the economists as a tool for analyzing economic competition as well as political conflicts. Game theory applies the logic of games in which different players compete against each other using strategy, tactics, and efforts and apply these in the events of real life. The concepts of the applied game theory are utilized in logical decision making. Game theory is mostly applied in the fields of economics, psychology, and political science. This critical essay will focus on outlining how applied game theory and the concepts therein can be used by an economist to develop a winning strategy at a certain company.
Game theory makes the use of mathematical and economic tools to make strategic decisions as well as solve problems. For a company that plans on extending its operations globally like in the case of Company A, the concepts of the game theory come in handy. Expanding globally encompasses several moves including starting operations across continents and not just a few foreign countries. Other tactics used by companies may include exporting commodities to these countries, licensing the businesses, forming potential strategic partnerships, acquiring businesses in the new countries, as well as constructing buildings for the businesses. As earlier mentioned, the fundamental insight behind the game theory is the logic of a game. Ideally, a game, and in this case in the context of a business, will consist of a collection of decision makers known as players, the possible information states of each player at each decision time, a collection of feasible moves; decisions and actions; a procedure to determine how the choices of the moves of all the players collectively determine the possible outcome of the game, and the preferences of the individual players over the possible outcomes, which are typically measured by a utility or payoff function. These are the basic insights that guide a winning strategy for businesses and in this case Company A.
The concepts and the tools of the game theory can play an essential role in a global expansion strategy for Company A. Strategic decisions for companies are the mandate of the executive or the senior management. In the game-theoretic model, the environment is in such a way that the actions of every decision-maker interact with those of the others to determine the result. This, therefore, necessitates that the actions of the senior management for Company A be interacting harmoniously to effect the winning strategy for global expansion. The behavior involving the interactive decision-making is referred to as strategic while the set of actions and moves by the individual player with respect to those of others and according to the rules of the game is referred to as strategy. Strategic behavior, which is associated with the senior management, is filled with uncertainties in areas such as prices, interest rates, and income, especially when one is venturing into new markets.
The strategic plan for which the economist in Company A is working on is to expand the firm globally. This means that the company has a task to create and sustain a customer base in the new frontiers for the operation to be successful. One of the critical assumptions of the game theory is that economists are rational players. Therefore, the goal of the consumer is to increase his/her utility. Consumers will always choose a product or service that provides the highest level of utility. Ideally, every rational player in the game theory seeks to maximize his utility which is represented by the payoffs at the end of the game. The game-theoretic models are in such a way that every action triggers a reaction. The interactions of the players in the game-theoretic model arise in two ways namely sequential and simultaneous. Sequential interaction involves each player taking action in a sequence of turns. Each player is aware of the previous turns that have been taken before him. Furthermore, each is aware that his current actions will have an effect on the later actions of the other players as well as his later actions in the game. On the other hand, simultaneous interaction occurs when players take actions concurrently without considering the current actions of others. Although the players do not know the exact actions of others, they are aware of each other in the game.
Global expansion will require a sequential interaction kind of an approach. This is because a business needs to monitor the actions of competitors which act as a guide to the actions that the company needs to take to stay competitive. The senior management should first analyze the markets in the target countries to analyze the way players in the markets operate. This will guide them in making decisions that will assist in penetrating the market. This kind of information can only be acquired if previous and current actions of competitors and other players in the market are known by the company. A simultaneous interaction approach would not provide a guide since actions are undertaken concurrently and as such, can only be left to mere chances. One of the powerful tools of the game theory that is used in illustrating and analyzing the sequential games is a tree diagram. The tree diagram depicts the possible outcomes over time. The tree combines the aspect of time and the logical and sequential connections among decision-makers and events. The tree starts at a specific point in time which is drawn as a single point in a two-dimensional space. It is at this point that branches emerge and each branch terminates to a node. It is at each of these nodes that an event occurs, such as reception of information, a random occurrence, or a decision.
This illustration can be taken to explain the global expansion of Company A. The tree represents the company as it currently is. The branches developing from the tree can be taken as the different openings in the different countries in the globe. The nodes terminating from the branches represent the different outlets that can develop from the growth of the parent companies in the different countries. It is from these outlets that information can be collected of what is happening in the surrounding environment and this is shared up the structural levels, eventually reaching the senior management. With information about the happenings at the grass-root level, informed decisions can be made from the top to the bottom. In the sequential kind of games, players observe the future moves of the other players and use them to assess the best current move to take. This will be an effective move for Company A in the global expansion strategy.
There are rules that govern the games theoretical model. The basic key rules include players, information, actions or strategies, and payoffs. The players are the decision-makers like Company A. Information that is held by the different players. This information can either be complete or incomplete, symmetric or asymmetric, or perfect or imperfect. This information concerns each others actions and payoffs, as well as the moving sequences. There are rules on the strategies or actions of the players with some being allowed and others not. The payoffs are the outcomes resulting from the actions taken. Furthermore, payoffs can be in the form of utilities. The senior management of Company A can apply these basic rules of the theoretical model to maneuver in the new markets globally. This is by identifying the relevant players who affect the operations of the business, gathering the information, analyzing the strategies and actions of the others to make up their own, and analyzing the potential outcome.
In conclusion, applied game theory has tools that can be instrumental in a global expansion of companies, and in this case, Company A. The concepts of the model include players who are the decision makers, information which gives insight on how the players engage in the game, actions or strategies that the players take individually or when interacting with others and payoffs which are the eventual outcomes. To expand globally, a sequential mode of interaction need to be applied which allows for Company A to act from an informed position whereby the company is aware of what other players in the market have been doing. The tree diagram also gives an illustration of how Company A should expand from the central firm to other locations in the world. The tree grows to branches which give rise to nodes from which important information can be gathered for clear decision-making.
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