Game Theory

Poker Who plays? Do you play the probabilities?

John von Neumann “The best mind of the 20th Century” 1928 - Mathematical genius von Neumann,

25, plays poker, invents game theory.– The odds are meaningless when someone

bluffs. 1944 - Von Neumann is a major force in

inventing the atomic bomb and the modern computer.

1950 - Two Rand Corporation scientists invent the Prisoner’s Dilemma game.

Game Theory

You have to take into consideration the objectives and strategies of the other players.

– Not just the probabilities– Not just your own goals and strategies– Your moves depend on their moves.

The Prisoner’s Dilemma In 1950 a conductor on a train to Kiev

rehearses for a Tchaikovsky concert. KGB arrests him for subversive activity. KGB arrests Boris Tchaikovsky, a worker,

on the streets of Kiev. KGB puts them in separate cells so they

can’t communicate. KGB offers them both a deal.

The Prisoner’s Dilemma

If the conductor rats and Boris doesn’t, he gets one year in a gulag and Boris gets 25 years.

If the conductor doesn’t rat and Boris does, he gets 25 years in a gulag and Boris gets one year.

The Prisoner’s Dilemma

If both rat, each gets 10 years. If neither rats, each get three years. The silent auction begins.

The Prisoner’s Dilemma Each serving 10 years, they meet in the

gulag, begin talking and discover they ratted on each other.

While talking they realize that if each had said nothing, they would only have been in for three years.

KAAA Decision Tree

KAAA

KAAA Go

KBBB Go

KBBB No Go

KAAA No Go KBBB Go

KBBB No Go

Boris

Conductor

Rat Not Rat

Payoff Matrix

Rat

Not Rat

10, 10 * 1, 25

25, 1 3, 3

* Conductor, Boris

Scenario KAAA-TV, on the West Coast, is

considering switching from its current prime time (8-11 p.m.) to early prime time (7-10 p.m.). KAAA is #2 in prime time, and because of KBBB’s very strong 10-11 p.m. lead-in to its late news, KAAA is #2 in late news even though its news product is competitive. KBBB is #1 in late fringe also.

Scenario KBBB-TV is #1 in prime time and has

excellent 10-11 p.m. network lead-ins to its 11 o’clock news, which puts it #1 in the late news race. KBBB is also #1 in late fringe.

KCCC-TV is a weak #3 in prime time and late news. It is a network-owned station and will not switch to early prime.

KAAA Decision Tree

KAAA

KAAA Go

KBBB Go

KBBB No Go

KAAA No Go KBBB Go

KBBB No Go

Payoff Matrix

KBBB

KAAA

Go

No go

Go No Go

4, 2* 3, 4

1, 3 2, 1

Assigning weights is the most difficult decision.

* KAAA, KBBB

KAAA’s Payoff Weights 4, 2 = If KAAA switches (go) to early prime

and KBBB also switches (go), both gain more revenue from higher ratings for 10-10:30 p.m. late news. KBBB doesn’t gain as much as it would if KAAA switches and KBBB doesn’t (3,4).

KAAA’s Payoff Weights 3,4 = If KAAA switches (go) and KBBB

doesn’t switch (no go) , KAAA gains revenue with its 10-10:30 p.m. news, but the news is up against KBBB’s strong prime and KBBB’s late news gets higher ratings than before because KAAA has dropped news from the time period.

KAAA Strategies 1,3 = If KAAA doesn’t switch (no go) and

KBBB switches (go), KAAA loses big because its weaker 10-11 p.m. prime is up against strong KBBB news which has strong lead-ins and strong late fringe.

2,1 = If KAAA doesn’t switch and KBBB doesn’t switch, nothing happens, but the outcome isn’t as bad as if KAAA doesn’t switch and KBBB switches (1,3)

KAAA Strategies Adding KAAA go weights (4+3 = 7) shows

switching is the best strategy, because its no-go weights (1+2 = 3) are much worse.

KBBB’s judged weights are the same with either decision (4+1 and 3+2 = 5).

KAAA Strategies KAAA’s best strategy is to announce it’s

staying with its current schedule, hoping KBBB will switch to gain an advantage and hurt KAAA (1,3).

Then, at the last moment, KAAA switches to early prime to gain its maximum outcome (4,2), assuming KBBB stays with its decision to switch.

Secrecy is critical.

Game Theory

See “Game Theory- Sales ” case on www.charleswarner.us/indexppr.html

Anyone want to buy a $20 bill?

The Prisoner’s Dilemma If the prisoners had been able to

communicate, what would have happened?

If they had been given a chance to play the game again and again, what would have happened?

The Prisoner’s Dilemma The rules for the game changes when

you play repeatedly, as the Rand Corporation scientists discovered.

And if the other side gets greedy (which is inevitable), you must use tit-for-tat.

You must teach the other side cooperation (to accept three years in the gulag)--to do what’s best for both.

Co-opetition

Customers

Complementors

Suppliers

Competitors

Business Ecosystem

Co-opetition What are syndicators? What are other TV stations? Strategy: “Help Your Competitors Get

Rich” Remember, Ecosystems Co-evolve.

– Wolves and caribou

Co-opetition It might be a smart strategic move to

change the game and the players. In fact, it might be a smart strategic move

to pay someone to compete (co-opetition).– Coke, Pepsi and NutraSweet– Lin, McCaw and Bell South

The lessons are:– Know what game you’re playing– Know the rules of the game– Play to win-win (cooperate)