Abhinav Sinha

The Game Theory

In Game Theory on September 28, 2010 at 11:51 pm

While driving around the India gate, have you ever wondered why most (if not all) ice cream vendors are stacked together in and around a small patch.  Or that most highway ‘dhabas’ are located in clusters. Or maybe, next time when you fly out do check why various airlines schedule flights fairly close to each other, on a given route!

It comes to me as a surprise why would each one of them choose to operate in a zone of maximum competition. Maybe a possible explanation is that since the cluster is already frequented by a lot of potential customers, it makes sense for a new entrant to logically attach itself to the cluster, rather than someplace else, where he would have to invest in building customer traffic.

The question to be answered is how the clustering begins. What would the scenario be like if there was a unchartered territory and just two players in perfect competition. Does system thinking in any way influence the way, they would approach setting up their respective businesses.

Consider a scenario where the two ice-cream vendors A and B, who have to sell their products at similar pricing for sustenance, have to decide on where to locate themselves on a stretch of road, that will make perfect business sense.

To capture the sense of this example, imagine that customers are smoothly distributed all across the road and brand and price being the same for both A and B, they choose on the basis of sheer convenience and proximity.

 Imagine that the two vendors ‘A’ and ‘B’ start by locating themselves at roughly a position shown above. It now appears to ‘A’, that they have a equitable access to business opportunity, since half of customers located between ‘A’ and ‘B’ will go to ‘A’ and the other half to ‘B’, depending on a convenient walking distance for them.

‘A’ turns out to be an aggressive competitor to ‘B’ and decides to move a 100 meters towards the center of the road so as to gain access to a share of ‘B’ customers while protecting his own share of customers (lying to his left).

To offset this, ‘B’ plays his own counter move and moves 200meters towards the center. Subsequently, ‘A’ moves 300 meters and this continues till both ‘A’ and ‘B’ are located right next to each other, at the center of the road.

Both A and B have created an equilibrium that stays even when a third player C enters the market. C has limited choice, but to locate itself within the cluster for survival.

This is of course until C weighs his payoffs and decides to locate at a niche location and offset the disadvantage by offering a discounted price to the customers. This of course will set up another un-equilibrium which in due course will be answered by the competition A and B.

The study of strategic decisions making process in an interactive environment is called ‘The Game Theory’.

It deals with the situations where people who are a part of same overall system but with different (mostly competing) goals, try to take into account each others’ actions in deciding on the optimal course of action.

The Game theory finds applications in a lot of areas including behavioral science, business and a number of conditions appearing in day to day life including interactive decision making in a competitive environment.

There is a whole lot to delve into when it comes to the game theory. However, for the sake of avoiding complexity, I prefer to punctuate the discussion merely at the juncture of definition itself.

Would be looking forward to build on this discussion further, based on your comments, queries and feedback.

  1. I can’t offer expert comments . However, the competition of the cell phone operators appears to me to be very similar to the vendors. As a result of cut throat competition an eqilibrium will be achieved. The worst possible thing is that they may form a lobby and keep uniform call rates. In that case the equilibrium will be not disturbed till some new big player comes into the picture. An altogether different scenario ( a very nostologic situation) may also develop if one single player takes over and acqires the others.

  2. Excellent theory bhaiyya and a great write-up. It definitely initiates a chain of thoughts with several dimensions…
    I have something to discuss..
    In business, it creates opportunity, Brand Image and in a way how the players use this to create a space for themselves in the market. I guess this is where the focus on the market/ target segment comes in. 🙂
    In life, we have several situation wherein we compare self to others in many aspects…one such example is, if in a team I have a person who is an excellent sales man and delivers his commits to the core…other members of the team strategically allocate themselves to perform in their strong areas and highlight it as a value-add for themselves and to the business they are in.

    Its my perception of how ‘Game Theory’ has a role in everyone’s life.

    Would request bhaiyya to comment more on the different dimensions of Game Theory and if we can apply it under situations where people can change the mindset from “compromise” to the “strategy” or the role which is in itself an important part.

  3. Abhinav,

    It basics back to 80 :20 principal , focus & dominance in high potential zone. This will ensure success but you need to be innovative always or quick response to competition

  4. Excellent explanation of “Game Theory” definition. Keep it up.

  5. it makes sense, Abhinav

  6. Hi Abhinav,

    The start is good and it is building up logically. As u have commented the game theory has application not only in business but in the behavioral aspect of humans as well.

    This needs to be emphasized in professional as well as personal sphere.

    look fwd to the updates on this post.

  7. This is quite logical though…it’s always less cost intensive to piggy back on someone else’s distribution stream rather than create new ones..Rural Reach seems to be the new agenda across organizations…and i have heard all of them harping on it for at least the last seven years that i have been around. Oraganization after organization will have a higher percentage of growth thru rural reach pegged in their strat objectives. But who wants to bell the cat? NONE. No one wants to invest in infra(read distribution structure) to create something that will have limited payout in the first few years of operation. Everyone is looking at each other to create a model that others could leverage. And hence we overinvest in metros and mini metros(read telecom players eying the same circles or new lauches targetted at Tier I cities) to create expensive growth models..luckily for India, it’s working at present coz of the immense opportunities that a growing GDP throws at us.. and until then we will have the more carts huddled in groups at CP for lesser mortals like us…btw, when are we doing our ice cream next:)

  8. Abhinav
    good and simple explanation of a phenomena we have all observed and wondered about. However what intrigues me is that even in an empty bus ( where there is no competition involved) passengers getting in will choose seats in a cluster. So what is driving this? Is it just the “herd” mentality of humans that we are explaining with esotoric theories, post facto? Just a thought.

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