Game Theory & Strategy Game theory is a tool for understanding how decisions/actions by players in the value net affect each other. - Play out all the actions/reactions into the future and then reason backward to determine appropriate actions today (assumes rational behavior). The main practical use of game theory is to help a firm decide when to compete and when to co-operate.

The Value Net Customers CompetitorsComplementors Suppliers Company

Customers CompetitorsComplementors Suppliers NINTENDO Toys “R” Us, Wal-Mart Sony, Microsoft Ricoh, Sharp (microchips), Marvel, Disney (game characters) Acclaim, Electronic Art (software); Mitsubishi, Sony, etc. (hardware-TVs)

Complementor complementor A player is a complementor if customers value your product more when they have the other player’s product than when they have your product alone. complementor A player is your complementor if it’s more attractive for a supplier to provide resources to you when it’s also supplying the other player than when it’s supplying you alone.

Competitor competitorsubstitutor A player is your competitor (substitutor) if customers value your product less when they have the other player’s product than when they have your product alone. competitor A player is your competitor if it’s less attractive for a supplier to provide resources to you when it’s also supplying the other player than when it’s supplying you alone.

Changing PARTS of the “Game” to Add/Capture Value Players Players: customers, suppliers, substitutors (competitors), complementors, you (e.g., HSC asking for pmt to play) Added Values Added Values: what each player brings to the game— raise your value added (e.g., TWA Comfort Class) Rules Rules: give structure to the game. Laws, customs, practicality, contracts. Using and revising rules to enhance the game. (e.g., MCC clauses) Tactics Tactics: moves used to shape the way players perceive the game and hence how they play. (e.g., IB fee structure) Scope Scope: the boundaries of the game. It is possible to expand or shrink the those boundaries. (e.g., multi- market competition)

The Value Net Customer s CompetitorsComplementors Suppliers Company Vertical Alliances Horizontal Alliances