Critically evaluate the usefulness of concepts from game theory and assess their applicability for developing effective strategies to build marketing relationships.
Approaching the question
The question is quite open in its range of answers. However, candidates are required to explain what the study of game theory is in broad terms and how its usefulness can be applied to marketing.
Here is a short extract that could be used as a benchmark answer (not to be reproduced verbatim):
‘Game theory can be useful in helping marketers understand the external environment, particularly the way in which firms can deal with competitors. It uses the metaphor of a game to describe this situation, and the participants are referred to as players. In our marketing context, game theory’s usual references to players will instead be companies, and the possible gain will be in terms of profits or sales. A game may consist of a single set of decisions, or a round, or it may consist of many rounds. Although such games cannot reflect all aspects of real life, they can give managers useful insights into the strategies that may work in the real world and an understanding of why some courses of action may be more effective than others.’
The assumptions made by game theory are as follows:
• Players are self-interested in that they try to maximise their own pay-off from the game.
• Players are rational – they can calculate pay-offs correctly and will select the ones that maximise individual reward.
• The optimum decision for a player will depend on how the other player(s) will react and, therefore, it requires a dynamic and interactive approach to strategic decision-making.
In a marketing context, the objective is to identify marketers’ optimal decisions under conditions of uncertainty and interdependence. Games consist of the following characteristics and conditions, which are known to the firms involved:
• a defined set of possible courses of action for the firms
• identifiable preferences of each firm among the possible outcomes of the game
• relationships whereby outcomes are determined by firms’ choice.
Firms within a game choose strategies by rationally examining available information, and by considering the actions open to them, the expected pay-offs and their expectations of other players’ decisions. The resulting equilibrium is the combination of best strategies for each player.
The identification of game theory concepts can be used in the context of relationship marketing. Candidates could perhaps approach the question by listing the set of game theory models (i.e. zero-sum; non-zero-sum; co-operative games; prisoner’s
dilemma scenario, etc.) and then identify an application.
For example, a non-zero-sum solution, as discussed in the guide, occurs when firms launched mp3 players and people knew very little about the technology. However, the advertising and promotional efforts of the different competitors meant that consumers were soon educated about the benefits of the new format. As a result of their combined activities the firms were able to increase the rate of expansion of the
market beyond what would have been the case if they had been operating alone and, as a result, all firms gained.
Candidates who can supply an answer with these kinds of illustrations
would do well.