Applications Of Game Theory

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GAME THEORY One possible application of Game Theory is in advertising. Advertising involves the promotion of products and services so as to expose the product or service to a greater number of people. The goal of advertising is to make more people aware of a company s product or service so that more people would avail of this product or service, and this would mean more revenues for the company. One way that a company can approach this goal is to expand the current market of consumers. This would entail directing promotional activities to consumers who have never tried the product or service or anything similar to it. Another way is to target the current market in the hopes of increasing market share. This means that there is a base of consumers currently using the product or service, but there are other companies offering the same product or service, and the company would like to increase the percentage of people availing of their particular company s product or service. This is the case where game theory is applicable. There are other entities that a company can consider as competitors. The company competes with these entities for a share of the market. These entities include other companies who produce the same product or the same service. Other potential competitors are companies that produce substitutes or complements to the product or service, new entrants to the industry, suppliers of the company, and distributors of the company. Game theory deals with competitive situations such as these and emphasizes the decision making process of the competitors. The strategy that the company will use is composed of the decisions that it will make at every stage of the process. In the case of advertising, the company must decide how much to spend in a certain region, for example. The overall goal of using game theory in advertising is to determine how best to spend advertising money in order to capture market share from other adversaries. To apply game theory to advertising, the adversaries must first be defined. First of all, there is the company itself. Next is their main direct competitor. Other adversaries may include smaller competitors, companies producing substitutes or complements, new entrants, suppliers, or distributors. Once this is done, the strategies of each adversary must then be defined. Assuming that the adversaries must decide how much advertising money to spend in a certain region, the adversary s strategy then would involve deciding how much advertising money to allot to each region. Certain companies might have stronger influences or name-recall in certain regions, so a competitor must decide how much money if invested in that region, would result in greater market share. After defining each adversary s strategy, payoff tables can then be constructed. The payoff table would show how much market share an adversary would gain or lose given the strategy of each adversary. Once this is accomplished, the game can then be solved. There are various ways of solving that are available. The simplest methods deal with looking for dominating strategies and using the minimax criterion, however these are often only useful when dealing with simple two-person, zero-sum games. Since the advertising game is more complex it involves more than two adversaries, and may not be a zero-sum game -- more advanced solution procedures may be used. For example, a graphical solution procedure, linear programming, or computerized solutions may be used. Before implementing game theory, the assumptions that were used must be made clear. In this case, it was assumed that the adversaries are competing strictly for market share, and thus the size of the market was assumed to be constant. This may not be the case in the real

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