Many graduate business school trained managers have a dislike to game theory because it tends to be taught as a mostly mathematical discipline, which tries to find the single best solution for a given problem of (human) interaction - in an often painstakingly mathematical way. For a taster have a read at just the Wikipedia article explaining game theory. In the so-called real-world the needed numerical information for such mathematics often do not exist or they are too cumbersome to generate in the given resource and time framework, but human interaction does exist as a fact and the basic underlying thinking behind game theory still holds, namely that the likely success of my action will depend on somebody else's reaction to my action. Therefore, how can we reconcile the benefits of the basic understanding behind game theory and the mechanisms and restrictions of the market?
The solution of how game-theory economics can enter the corporate boardroom is to be arguably found in Business War Games. Business war games simulate the interactions of multiple actors in a market in several rounds of role playing. This approach is becoming more and more used by strategy consultants in order to help the clients find their best possible strategic move (e.g. see these two McKinsey publications: Playing War Games to Win and Getting Into Your Competitor's Head). The limitation of this approach is however obvious: one needs to think and feel like the competitor(s). Where game theory struggles in it's corporate application with the mathematical inputs needed war games struggle with the insight information needed about the other market participants' situation, information and emotional state. But at least if anything, as the Economist points out, the role playing exercise starts forcing top-management to think from the competitor's point of view, or as Sun Tzu would have said “To know your enemy, you must become your enemy.”
In our seminar about Strategies in the Internet Era we will apply the technique of business war games to Skype as a case study, trying to determine why Skype has not been able to make us give up our relatively expensive phone contracts for the promise of free telephoning around the globe, why it might indeed made have sense for Microsoft to have bought Skype and what Microsoft and Skype might make of its future.
To inform our seminar discussions please have a read through the linked articles (including the Wikipedia introduction to game theory :-) and start thinking about why you still have a (mobile) telephone contract while you could phone free of charge using Skype and what Skype or others would need to do to make you give up your contract with the telecom provider of your choice.