Bridging the gap between business and consumers with Game Theory...
If the headline and subhead made you feel this article is for marketers and economists, let me assure you, this is a piece for us – consumers. I'd like to shed some light on how our relationships with businesses/brands have been, how it will continue to evolve over time, and how it can be more humane and ultimately, less transactional.
So why 'game theory', what’s the angle?
I believe you'll understand the connection once I refresh that term's definition. According to Investopedia:
'Game theory is the process of modeling the strategic interaction between two or more players in a situation containing set rules and outcomes.'
In simpler terms, whenever we have a situation with two or more players that involves quantifiable consequences, we can use game theory to help determine the most suitable/preferred outcome.
It’s not hard to grasp that in the game of business these major players are – companies, their competitors and consumers. Here’s an example, how game theory can be applied in the same business situation by companies and consumers.
A and B are two competing companies that sell cars and they are the only two dealers present in that market. Their discounts are on par, just on different days. On certain days of the week A offers better discounts and on other days, B does. Depending on the day, buyers choose whether to buy from company A or company B - fairly simple!
Then suddenly company A changes their pricing strategy. They introduce better discounts than B throughout the week. E.g. if company B is selling a car at a minimum price of $50,000 on Wednesdays only, company A starts selling the same model at $49,000 on all days! Naturally, all the customers come running to company A! But how did they make it work? Is it viable for them?
Company A looked at their sales data and realised that almost all the customers that bought cars from them, also bought accessories. Like – seat covers, stereos, etc. Only a few didn’t buy any accessories, or tried to negotiate harder on those prices. That gave A the brilliant idea of lowering the price of their cars and increasing the price of the accessories in such a way that they wouldn’t just break-even, but earn a profit. Something like this:
Smart, isn’t it? Even after selling the car at a lower price, A managed to earn $200 more on almost every deal! The poor customers that were getting a better deal from B, now pay more and foolishly thought that they were getting the best ‘value for money’!
It’s important to note, this situation could change if a smart buyer wanted to look for better prices. With a little more research, they would buy the car from A at $49,000 and the accessories from B at $1,300; thus, a total price of $50,300.
The sweetest deal! Without even knowing it, smart buyers are forever engaging in game theory all of their own!
Now that we’ve seen how game theory affects decision-making, let’s see how it stimulates two completely contradictory models - ‘Business Vs. Consumers’ and ‘Business and Consumers’.
Business Vs. Consumer – A zero-sum game
The above reference is a classic example of a ‘Business Vs. Consumers’ case. In game theory it’s known as a non-cooperative or competitive game. As the name suggests, in this game, out of all the parties, only one can win and the rest lose. Here company A wins, while company B and the consumers lose.
If we drill down further, we’ll see it was quite a logical choice for A to offer discounts throughout the week, as that reaps them the best results, irrespective of what B does. This is known as ‘Nash Equilibrium’ in a competitive game.
The above reference is quite common for big ticket items, like cars, furniture and consumer durables (TV, refrigerator) etc. The general tendency of consumers is to look for better deals/bigger discounts for these items, whereas for smaller items, they don’t do it as much.
Clever companies make full use of this buying behaviour. They bring the prices down for the big ticket items, so people buy their brand over their competitors’, and then push the prices up for the smaller items, like accessories that consumers don’t worry about too much.
So next time you attend a Mega Sale - online or in-store , you know what to do! Be vigilant!
This may seem trivial, like one of those games where the smart one wins, but it reveals an attitude of businesses and brands that isn’t just unhealthy, but has severe implications on people, society and sometimes even on the ecosystem!
The problem isn’t just that one wins by beating the others. It’s rather to what extent one actually goes to beat the rest!
Unfortunately, this has been the attitude of many businesses for decades and the more their marketing/advertising budget grew, the stronger this desire to win became. For instance, check out these vintage cigarette ads.
A smoker would smoke with or without ads; cigarette brands were aware of this all along. But what about them that were on the fence, or were trying to quit an unhealthy habit; or kids in their early teens - an impressionable age? Advertising like these were severely misguiding - especially, seeing doctors recommend smoking those brands! The brands surely sold more cigarettes and earned better market share, but who here really paid the price!?
In today’s data-driven economy, this ‘win-lose’ game has found a new definition. Forget about studying consumer data and understanding their buying behaviour to sell smarter; now companies have started selling the data itself! Earning money both ways! E-commerce is an ideal example of that.
But there must be an alternative beyond this constant competition, right? Well there is, and that’s the other and better way to apply game theory.
Business AND Consumer – The ‘win-win’ game
While the zero-sum game has been ruling the business segment for decades, and is still a favourite tactic for some industries, we’ve seen the emergence of another approach taken by some responsible companies lately.
Instead of indulging into a cut-throat competition with their corporate contemporaries or treating consumers as an opponent, these brands have started involving them as partners, choosing to play a game of another kind – a Cooperative or Coalition game.
Simply put, a cooperative game is where all participants agree to work towards a common goal and based on their contribution, receive rewards or benefits. Rather than stabbing each other in the back and exploiting their consumers, businesses work together to help each other and consumers better from that coalition. So, rather than a ‘win-win’, it's actually a ‘win-win-win’ game! Awesome!
Why is that important?
Because, a ‘competitive game’ is not a sustainable business approach. No matter how big an organisation is, in this ever-changing business climate, companies can’t survive in the long run by killing off one another.
The ones that understand the value of working together will stick around. Because, if they don’t work together, new/emerging players will, and by holding hands they'll beat the big players at their own game. (Something which has started happening already!)
Apart from sustenance, collaboration-over-competition yields many other benefits too. To name a few, these are:
1. Innovative solutions and better output utilising each player’s strengths.
2. Optimum utilisation of resources > less exploitation.
3. More stable economies and markets.
4. Rewards for everyone.
5. Better value for people and society.
Smart companies understand this. That’s why there’s been a surge in collaboration over the past decade and the numbers are growing day-by-day! A couple of good examples of this are:
1. Harvard + MIT: When world’s two premium universities held hands to offer free online courses.
2. Microsoft + Toyota: Software meets automobile to provide intelligent energy consumption.
3. Coca-Cola + Heinz: Players from related industries teamed up to offer eco-friendly packaging.
And the list goes on…
In fact, you would find many of these companies have got into multiple collaborations with different companies to offer better quality products/services, better value for consumers and innovative solutions. That’s the future businesses should strive to build together, and that’s the only way of survival, because:
'No matter how brilliant your mind or strategy, if you're playing a solo game, you'll always lose out to a team.' - Reid Hoffman
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Cross-Post: This article was originally published on the LinkedIn Blog.
