STRATEGIC COMPETITION,
COMPETITIVE ADVANTAGE
& GAME THEORY
We will look at two facets of ‘game
theory’
Antecedents
• Military strategists
• A branch of mathematics in the inter-war
years: John Nash (“A Beautiful Mind”)
• Post WW2: Nuclear arms RAND (USA)
• Biology (evolutionary game theory)
• Economics: bargaining models of wageprice determination
• Business Strategy
First facet:
Strategic Competition
Strategic thinking is the art of outdoing
an adversary knowing that the
adversary is trying to outdo you.
Dixit & Nalebuff: Thinking
Strategically, 1991.
High
Differentiation
Focussed
differentiation
4
Hybrid
3
Perceived
benefit
Low
price
5
2
6
1
7
8
No frills
Strategies
destined for
ultimate failure
Low
Low
Perceived price
High
Is this sensible?
Perceived
benefit
High
+100
Your
Product
C
B
0
X
-100
A
Low
Low
Your Price
(22,000)
High
Price
Presumably, it depends on what the
others choose to do …..
Presumably, it depends on what the
others choose to do …..
We will see that where there is a small
number of competitors, the “payoff” to
you of any choice CANNOT be known in
advance; it depends also on what choices
others make.
As a simple (hypothetical) example, we consider
• a market with two dominant competitors
• sell very similar products
• in hard times, and each is considering whether or not to
cut price
• market demand is sensitive to price, but only to a small
degree
We assume:
Game played just once,
and
choices simultaneous
Me
Cut price
Stick
Cut
price
You
0
Stick
0
Me
Cut price
Cut
price
You
Stick
?
?
0
Stick
0
Me
Cut price
Cut
price
You
Stick
-4
-4
0
Stick
0
Me
Cut price
Cut
price
You
Stick
-8
-4
-4
+7
0
Stick
0
Me
Cut price
Cut
price
You
Stick
-8
-4
+7
-4
+7
Stick
-8
0
0
Form yourself into pairs
Game 1: (5 minutes max)
Using our payoff matrix each of the individuals
in the pair should write his/her name on a
post-it note and write ‘Cut’ or ‘Stick’
1. Don’t discuss what you will do with your
competitor
2. Don’t let the other person see what choice
you make
3. Then swap your two notes with the pair next
to you.
• Dominant strategy for both is CUT PRICE.
• This is a poor outcome for both firms.
• There are benefits from co-operation here
• But cheating may lead to higher benefits.
Game 2: (8 minutes max)
Using our payoff matrix each of the individuals
in the pair should write his/her name on a
second note
1. Discuss what you will do with your
competitor
2. Agree what you will both do
3. Write that down and let each other see
4. Write down below your agreed choice what
you will actually do, without showing it
5. Then swap your two notes with the pair next
to you.
Many types of games
•
•
•
•
Simultaneous and sequential
Once-off and repeating
More than two players
Various structures of the payoff matrix
Dixit and Nalebuff look at many of these
and give advice on how best to play the
game
PLAYING GAMES TO YOUR
ADVANTAGE: STRATEGIC MOVES
A strategic move is designed to alter other
players’ beliefs and actions to make outcomes
of games more favourable to you.
•THREATS AND PROMISES
•WARNINGS/ASSURANCES
•COMMITMENTS
Cooperation between
‘competitors’
• profit-maximising cartel (OPEC)
• entry prevention pricing (limit pricing)
• price leadership
• avoidance of price competition: use of
non-price competition
• agree about standards
But while co-operation is often
beneficial to all parties, cheating
may be better.
Cooperation is likely to be very unstable
between competitors
THE CHANCES OF SUCCESSFUL COOPERATION
Depend on:
• the magnitude of the potential gains
• the temptation to cheat, the chances of detection,
and the chances of effective punishment
• whether game is repeated (and so whether retaliation
can occur)
• whether trust has been established
Repeated games
Players interact repeatedly in the future (but an
unknown, or infinite, number of times).
The outcome in a repeated game is much more likely to
favour cooperation (here, price unchanged).
A “tit-for-tat” strategy is often a very good strategy in a
repeated game.
“Mixed” strategies are also good.
Our second approach: Co-opetition
B.J. Nalebuff and A.M. Brandenburger Co-opetition (1996)
Business is both about competition and
cooperation.
Cooperate about the size of the pie (win-win)
Compete about division of the pie (zero-sum)
The value net
Competitor
Customers
Company
Suppliers
Complementor
COMPLEMENTORS
Customers’ side
A player is your complementor if customers value
your product more when they have the other
players product than when they have yours alone.
Suppliers’ side
A player is your complementor if it is more
attractive for a supplier to provide resources to you
when it is also supplying the other player than
when it supplying you alone.
COMPETITORS
Customers’ side
A player is your competitor if customers value your
product less when they have the other players
product than when they have yours alone.
Suppliers’ side
A player is your competitor if it is less attractive for
a supplier to provide resources to you when it is
also supplying the other player than when it
supplying you alone.
Golden rules
• Compete with your competitors
• Cooperate with your complementors
Your “competitors” may be both competitors
and collaborators
Put yourself in position of BA
What is its relationship to KLM?
• Competitors for customers (and landing
slots)
• Complementors with respect to Boeing and
Airbus (development costs)
(Especially important when development
and fixed costs are SUNK)
Supplier relationships are as
important as customer
relationships.
(Think about Porter’s 5 forces
model here)
Potential entrants
Threats of
entrants
Competitive
Rivalry
Suppliers
Bargaining
power
Buyers
Bargaining
power
Threats of
substitutes
Substitutes
Potential
entrants into
supply market
Potential entrants
Threats of
entrants
Competitive
Rivalry
Suppliers
Bargaining
power
Buyers
+ cooperation
Collaboration
with suppliers
Bargaining
power
Threats of
substitutes
Substitutes
5 Force analysis: another way of thinking
about one of the key questions

What can be done to influence the impact of the five forces?
Game theory suggests:
Try to change the “game” to your advantage?
Collaborate over standards
 collaborate over new technologies
 share risks
 encourage in new entrants on supply side
 Make commitments (change game from simultaneous to
sequential)

Added value
How much added value do you bring
to a game? This is how much - at a
maximum - you can expect to get
from the game.
TEAM PROBLEM
An example we ask you to explore:
Holland Sweetener (pages 70-74 in
‘Co-opetition’)
Added value and bargaining power
What did Pepsi and Coke do right?
What did HS do wrong? And what should it
have done instead?
What did Monsanto do right?