What does it take to win?

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Brief description on Game theory

What is a Game Theory? Why is it required?

The game theory makes us analyze the interaction among people, companies, animals, etc., in competing situations.

It used in bargaining with local vendors, playing strategic games, trading/ stock market, advertisements, and making peace between countries.

Let’s dive into it.

We all are aware of chess. Chess is more about playing your move while anticipating the opponent’s strategies, that is, one can counter or attack based on the opponent’s way of tackling the game. Though it is rare to draw in chess, if the players have proficient in the game, then there are chances that it will lead to a draw. Otherwise, one will always win. Suppose two AIs with equal efficiency and intelligence are playing chess. Then the audience can predict the outcome just by using the game theory, which is more likely to be a draw.

Every business model in the market follows game theory to sustain the competition.

Let’s start understanding what competition is, who made it and why it is important.

What is the competition?

It is a way of fighting for a common goal, where one’s loss is another’s gain. When more than one candidate is involved, competition is natural to arise.

Who made it?

Every individual living is competing with one another. As Darwin suggested, “Survival of the fittest’’. Competition is fundamental for survival in any situation.

Why is competition important?

When we fight for the common goal, it is obvious that people are putting in their best efforts. Now, depending upon the type of game, the outcomes are one win, and the other loses or both win/lose (kind of a draw).

Say two players, Alice and Bob, are playing some game. If Alice has a strong strategy, no matter what, she will win. It is called strategic dominance. But what if Alice and Bob both have stronger strategies than how the spectator could predict the outcome?

This problem was solved by John Nash.

For instance, X and Y are two major biscuit-producing companies. Company X sells biscuits in aluminum foil and carbon cartons with a scratch card of up to 5₹ cashback. And Company Y sells biscuits in flat bottom bags with a 20% extra quantity.

Both companies have an equally strong marketing strategy to attract customers. Therefore, being a customer, I can choose the best option from the market. And because X and Y both are strong to predict the outcome, we need Nash Equilibrium.

Nash Equilibrium is generated when both parties play for their benefit. In other words, if one always looks for its benefits, it will eventually lead to Nash equilibrium.

Some may go for a 5₹ cashback strategy, and some may like to prefer a 20% extra quantity. It is the case where both companies either win together or lose.

Both are offering the best services to entice their customers. However, Company X and Company Y are not gaining any extra profit from this competition. Some customers may go for a 5₹ cashback strategy, and some might prefer a 20% extra quantity. It is the case where both companies either win together or lose. In other words, both companies are getting similar profits or losses.

Hence, they both are being the victims of the Nash Equilibrium. Here, Nash equilibrium is regret-free but this isn’t always the case. Say, if they have deviated from the Nash equilibrium, then there would have been ups and downs in their profits.

Reference:

(1) Introducing Game Theory: A Graphic Guide by by Ivan Pastine (Author), Tuvana Pastine (Author), and Tom Humberstone (Illustrator).

Author: Aishwarya Gautam

Editor: Shubham Singh