What is the Game Theory and How do Businesses Use it?

Business model

The Game Theory was formulated back in the 1950s. It is also one of the most followed and practised formats in recent times too.  In simple terms, game theory is the study of mathematical models of deliberate relations between two business partners or any rational decision makers. A lot of companies make use of this strategic analysis in their business to keep up their ventures in a successive continuation. This model of business strategy is applied in a lot of fields like social science, biology, computer science etc. Game theory has it implications in not just subjects but also in human behavioural relations.

The strategic games that happen between two players in different companies: the games are just mathematical scenarios. The games ascertain the logical decisions that the players should adopt to reap good benefits. This is actually a powerful tool that probes the company to predict better outcomes. The participants need to have a clear idea about the needs and functions of the other as this is a complex arrangement that one decision could affect the other in a huge way. There needs to have an understanding between the two companies. Both the parties will look into the strategy of others and the understanding between the two while taking into the account of payoffs; it will help to formulate an optimal strategy.

Game Theory utilizes the strategic calculations through some social or individual models. When analysing the behaviour of the firm, a thoughtful and logical understanding could be reached about their strategic choice that is laid bare to them. They will have the option to raise the money or bring it lower or even holding it still. The theory formulates whether their production should be paused or develop new products. The Game Theory also formulates an idea about what to do about the promotional aspect of the product: whether more money should be used for advertising or spending less on them or even sparing anything at all. The options and choices are many and a final decision can be approached when the strategic dialogue will be over. The possible payoffs would be like more profits for the shareholders, greater market share or even eliminating a possible rival.

In proper truth, no two companies trust the other no matter what the consequences are. Game Theory suggests this nature of the companies too. The Theory is also helpful to the managers of the firms to understand the expected positive and negative payoffs. Adopting this way would possibly reduce business risks and also gain a strategic idea about the other firms while keeping in tab with their own shortcomings. Gaining an insight into their own business will prompt them to think deep and intense. More sensible decisions will be made and firm will slowly recuperate if there were any downfall.

About Mohit Tater

Mohit is the co-founder and editor of Entrepreneurship Life, a place where entrepreneurs, start-ups, and business owners can find wide ranging information, advice, resources, and tools for starting, running, and growing their businesses.

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