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Proposal for Ph.D. Thesis

Area of Study

SME’s in London

Proposed Title:

Analysis of Co-operative game theory for

SMEs in a competitive Environment.

Proposer: Mahen Gangiah

Email: alvingangiah@googlemail.com

Tel: 07799291899

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Content

Page

1. Introduction ---------------------------------------------------- 3

2. Background of Study ------------------------------------------- 4

3. Statement of Problem ------------------------------------------- 5

4. Research Question ------------------------------------------- 6

5. Research Objectives ------------------------------------------- 6

6. Literature Review ------------------------------------------- 7

7. Research Methodology ---------------------------------- 8

8. Data Analysis ------------------------------------------- 11

8.1 Data Collection Method ---------------------------------- 11

9. Proposed Development ---------------------------------- 11

10. Original Contribution ------------------------------------------- 12

11. References ------------------------------------------------------- 17

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1. Introduction

If you walk down the streets of London and ask any anyone: How do SMEs operate?

Some will say it is about offering the best services to customers. Others will say that

SMEs are the survivors of a tough competitive market. Some will argue that it is all

about good management. Some will also say it is about getting finance. However,

very few will mention networking, cooperation, union, education or even the best

strategy to win. SMEs contribute with a combine turnover of £3,100 million in 2012

and of all the businesses 62.7% were sole proprietorship, 28% were companies and

9.3% were partnership. (FSB, 2013) With the current UK Government invention to

boost up SMEs funding, with an additional £300 million, one can assume the

likelihood of an increase in SMEs in UK.

On the contrary, little research has been conducted on Game theory in SMEs (Tidd et

al, 1997) In Business, Game theory aims to help organisation to understand situation

in which decisions can be made. (Osborne, 2000) Game Theory has provide a

methodology that has brought insight into many previously unexplained phenomena

by allowing asymmetric information and strategic interaction to be incorporated into

the analysis. (Chalterjee et al, 2001)

This research proposal will look into how game theory could help SMEs in different

sectors to achieve a higher payoff by cooperating with competitors while there is

excess demand in the market. In addition, this research will educate SMEs about the

market, opting for opportunity cost3, introducing SMEs networking in their particular

sector. Moreover, this research could help SMEs to grow through Mergers and

Acquisitions.

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2. Background of Study

This research will help to promote effectiveness, profit maximisation in a competitive

environment3 for SMEs. Since little research has been carried on game theory in

SMEs and the current government intervention to boost up Entrepreneurial in the UK,

the study will focus on how co-operative game theory could help Micro, Small and

medium enterprise in the UK to maximise their profit by co-operating together as

opposed to Sum zero Game where there is one loser and one winner. In addition,

Game theory would help players5 to facilitate decision-making for further expansion

through Mergers and Acquisitions.

Proposed

Game

SCENARI

O DETAILS

INDUSTRY

SECTOR SIZE

EMPLOY

EES

1 CAB RENTAL COMPANY SERVICE MICRO <10 2 SECOND CAR PARTS SERVICE MICRO < 10

3 MANUFACTURING COMPANY furniture

MANUFACTURING MEDIUM < 249

4 FOOD /RESTAURANT MAN/SERVICE SMALL < 50

At this preliminary proposal stage the research will focus on four different industry

sectors in the market. These sectors would be described as scenario 1, 2, 3 and 4where

scenario 1 would be based a Cab rental company. Scenario 2 would be based on a

second hand car parts supplier followed by scenario 3 would be based on a medium

size furniture manufacturing company and lastly Scenario 4 would be based on

Food/Restaurant industry sector. However, Scenario 4 is yet to be defined at this stage

due to the fact that most customers prefer taste rather than location, brand and price.

(O'Boyle, 2011) These four different scenarios have a complete different customer

based and the possibility that the outcome might vary might still be questionable at

this stage.

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3. Problem Statement

Game theory has been widely used in larger organisations to promote successful

strategies but on the other hand there has been lack of research made on strategic

management for SMEs. (Fierro et al, 2007) As of 2012, there was an estimation of 4.8

million businesses in the UK, which create jobs for 23.9 million people. (FSB, 2013)

It is believed that there will be more SMEs in the coming years due to the fact that the

UK government injected £ 300 million for SMEs loan. (Guardian, 2013) On the other

hand the Guardian, 2013 cited that the UK government would also help SMEs to

grow. In addition, one of the growing concerns in SMEs is that most businesses act in

their self- interest to achieve a larger proportion of the market size or to maximise

profit. (Fierro et al, 2007) The ideology to “beat your competitor” is challenged and

put to question in this research proposal.

Based on the above problem statements, this study is undertaken to fill this knowledge

gap and test the co-operative game theories on how SMEs cooperate with their

competitors and still maximise their profit. It is also to be noted that based of the

game theory SMEs could have the advantage to grow through Mergers and

Acquisitions. (M & A)

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4. Research Questions

a) What is the extend of the application of co-operative theory in a competitive

environment for proposed scenarios in terms of

- Current economic conditions

- New players entering the market

- Existing players exiting the market

- Experience, maturity, training of the players

- Sustainable growth strategies

b) How to measure competitiveness in the market when all players want to

achieve higher payoffs?

c) How does factors such as size, location, availability, and negotiation skills

have an impact in the degree of adopting the co-operative game theory?

5. Research Objectives

The main objective in this study is to examine the co-operative game theories in a

competitive market for SMEs in London. In doing so, the study will seek:

a) To investigate the extent of which co-operative game theory could be applied

in different sectors in the market.

b) To see how factors such as size, location, availability, negotiation skills,

maturity of players have an impact on the game.

c) To see the best possible scenario where most players would win in their own

sectors.

d) To highlight the findings those are of interest towards co-operative game

theory.

e) To ascertain that players understand the rules and boundaries of the game by

implementing proposed strategies.

f) To investigate the possibilities of growth through M&A in SMEs

g) To Educate Players on game theory and strategic management

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6. Literature Review

Cooperation games

Cooperation games are those in which the other players are no longer treats as

opponents, but also as partially becoming partners, cooperators, etc. These are players

with similar goals.

Noble (1995) argued that the co-operative game theory has some flaws. One of the

main drawback would be that the “Players” have different perceptions of the world

and that might affect the game. The author also citied that co-operative game theory

was intuitive and commonsensical. However, other noble scholars and authors did not

share his views. Brandenburger et al (1995) opposed Noble’s argument and cited that

co-operative game theory allowed players to look for a win-win as well as win- lose

opportunities. By keeping both strategies in minds, the authored claimed that knowing

both possibilities were important because win- lose situation often backfire. In

addition Brandenburger et al (1995) also pointed out that most common and

dangerous strategic move a player can make is to lower prices to gain market share, as

a result this would only be beneficial in the short run and the wins would evaporate if

competitors would match up the price. Thus, creating a lose-lose scenario.

Brandenburger and Nalebuff (1997) suggested that co-operative game theory creates a

solid relationship among players and players can set rules. On the other hand, in a

non- cooperative game, all players had to follow strictly to the rules of the game and

posit equilibrium behavior as the norm. Osborne (2000) argued that all players think

rationally towards their goals. In a non- cooperative game, as per Osborne, players

would face a fiercer competition, stressful environment and less room for growth as

opposed to a co-operative game. Similar views are shared by Erhan and Keskinocak ,

(2003) the authors explained using the prisoner’s dilemma that firms have to fight

harder to get a bigger portion of the market in a rational non- competitive game.

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Terms Explained ( Turocy. T & Stengel . B, 2001)

Common knowledge

A fact is common knowledge if all players know it, and know that they all know it,

and so on. The structure of the game is often assumed to be common knowledge

among the players

Dominating strategy

A strategy dominates another strategy of a player if it always gives a better payoff to

that player, regardless of what the other players are doing. It weak ly dominates the

other strategy if it is always at least as good.

Extensive game

An extensive game (or extensive form of game) describes with a tree how a game is

played. It depicts the order in which players make moves, and the information each

player has at each decision point.

Game

A game is a formal description of a strategic situation.

Nash equilibrium

A Nash equilibrium, also called strategic equilibrium, is a list of strategies, one for

each player, which has the property that no player can unilaterally change his strategy

and get a better payoff.

Player

A player is an agent who makes decisions in a game.

Rationality

A player is said to be rational if he seeks to play in a manner which maximizes his

own payoff. It is often assumed that the rationality of all players is common

knowledge

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Zero-sum game

A game is said to be zero-sum if for any outcome, the sum of the payoffs to all

players is zero. In a two-player zero-sum game, one player’s gain is the other player’s

loss, so their interests are diametrically opposed.

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7. Research Methodology

7.1 Proposed Research Design

Research design would be carried for each scenario and would be treated as

independent case.

a. Literature Review

b. To determine and define research question

c. Apply research question on field

d. Prepare to collect data on the field

e. Evaluate and Analyse data

f. Prepare Report

g. Literature Review and Comparison of Data to different Scenarios

7.2 Research Methods

Research would be carried in both Qualitative and Quantitative methods for the

duration of this research.

Qualitative Research would be based on Face-to-Face Interviews, Anecdotal Data

Observation, Industrial Placement and Customer focus group.

Quantitative Research would be based on Experimental design such as surveys tracker

sheets, design contracts.

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8. Data Analysis

Scenario 1. Car Rental: Data would analyse demand and supply through telephonic

record tracker sheets, sales receipts, emails, clicks on website. Alternatively, analysis

of contract would be able to determine the effectiveness of the theory.

Scenario 2. Second hand Car Parts: Data would be analysed through Cards design

with barcode number that will register effectiveness of the theory.

Scenario 3. Restaurant: Analysis data from voucher collected would help to determine

the end results.

8.1 Data Collection Methods

- Market Research: To determine Demand and Supply Models

- Questionnaires: To understand the limitation of the Game

- Experimentation: Scenario 1: To design a Contract

Scenario 2: Design a Bar Code credit card type

Scenario 3: To design Vouchers

- Observation: Short training placement of 2 months to understand the structure

- Customers focus group

9. Proposed Development

Year 1. Research training, Market Research, Literature Review, Research Questions,

e- learning, deigning game adaptation.

Year 2. Application of Game theory, Main Empirical phase, Analysis of Data (Start),

Finalising literature review. Experimentation phrase and data collection

Year 3. Data Collection, Finalisation of Analysis, complete writing.

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10. Original contribution by Researcher.

The aim of this research is to determine whether Co-operative game theory could be

applied to SMEs to maximise profit as opposed to zero sum game where player 1

wins and player 2 losses (Vice Versa). This research will also help SMEs to search for

new ventures, understanding the market, create networking, and breed a new strategy

to co-operative with competitors. In addition, little networking has been done for

SMEs and this research is believed to help SMEs to create new knowledge, problem

solving and also support to new entrance.

A few assumptions are taken into consideration at this stage of the proposal, where it

is believed that players would co-operate with competitors and in real world scenario

and this ideology could be rejected due to the fact that most SMEs players act in their

own selfishness to gain a greater proportion of the market. It is also assumed that

players would play the game in such economic condition. Due to the decrease in

demand, competitions are getting tougher and tougher.

10.1 Proposal of co-operative game theory.

Scenario 1 of the Game

Rent a Cab is a small business in London and deals with hiring PCO cars to potential

taxi drivers. In 18 months of operation, the company has now a fleet of 50 cars. Rent a

Cab London (Player A) has been experiencing an increase in demand over las t 4

months. In July, Player A has more than 70 demands for Cab and due to time and

financial restrain he could not increase its fleet in the short run.

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In fear of loosing his customer, Player A turns to its competitors (Player B, C &D) for

help. Player A makes a contract with player B to supply him 22 cars and in return

Player B will provide player A with two of its own cabs and make a different contract

with player C for the remaining cabs. In return player A will gain £15 per cab as

payoff and Player B will have a payoff of £ 135 per car assuming that the average

JAN FEB MARCH APRIL MAY JUNE JULY

DEMAND 30 20 50 52 55 60 72

SUPPLY 30 20 50 50 50 50 50

0

10

20

30

40

50

60

70

80

no

of

tax

i to

re

nt

PLAYER A : RENT A CAB BUSINESS ACTIVITY

PROPOSED APPLICATION OF CO-OPERATIVE THEORY IN SCENARIO 1

£

PLAYERS LOCATION

NO OF

FLEE

T

AV

PRICE

PER CAR SUPPLY

PLAYER

A RENT A CAB EAST LONDON 50 150 0 PLAYER

B AB CAB RENTAL WEST LONDON 43 150 2

PLAYER

C LSC CAB RENTAL

NORTH EAST

LONDON 25 150 12 PLAYER

D LONDON CAB

RENTAL SOUTH LONDON 78 150 19

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rental price of a cab is £150. On the other hand, player B can only supply 2 cabs and

has to make a contract with Player C to achieve its target. Player B payoff would be 5

x £135 + 25 x £15. Similarly is sequence is repeated among all players. Opportunity

cost of player B is to gain (win) £ 50 or gain (lose) £ 0.

Player A = α Player B = β Player C = γ Player D = δ = 15

. α = (10*150) + (20 * β + γ + δ ) s ∏ =

300

. β = (5*150) + (15* γ + δ ) s ∏ = 50

. γ = (10*150) + ( 5* δ ) s L= 225

. δ = (5*150) L

= 225

(4500)

In this game, the best outcome would be to co operate with other players, Even if

player C & D are making a loss, the opportunity of earning £ £1275 and £525

respectively is consider to be a win win strategy.

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10.2 Problem with theory of Co-operation.

At this preliminary stage, this theory would not be applicable to different SMEs

operating in different sectors such as food/Restaurant. Due to the unavailability and

lack of research and customer’s personal taste it would be difficult to test this game in

the food sector.

In addition, It is also assumed that customers will not be dealing directly to player B,

C, and D. It is also assumed that the overall average price to rent a PCO cab is £150.

It is also to be noted that additional overheads such as rent of premises, valeting,

servicing would affect would also affect the decision making of Player C, D.

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