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Game theory and strategy

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  • 1. Game Theory and Product Strategy Or: Its all fun and games until someone loses an eyeball Nir Soffer http://www.linkedin.com/in/nirsoffer @TheNirEast

2. Game Theory and Strategy Its all fun and games until someone loses an eyeball 3. What? A primer on basic game theory concepts Very basic No math! If you know a lot about Game Theory already, you may get bored A discussion on applying game theoretic concepts to product strategy 4. Why? I think Game Theory is Fun! Interesting perspective on behavior of both people and firms Analytical toolset for competitive scenarios 5. Who? Israeli, permitted to live in Austin by his cat Student of Behavior and Business GTM Consultant for multiple startups Previously in PdM and Strategist in Dell and a variety of software development roles First time ProductCamp Presenter! Very, very bad at making slides pretty. 6. Agenda What is Game Theory? A Few Games and Business Analogies Rock, Paper, Scissors: Zero-sum, symmetric game Prisoners Dilemma: Pricing, market entry, volume Iterated Prisoners Dilemma: TFT Collusion/Cooperation in IPD cartels Chicken and the Value of Commitments Investment, market entry 7. What is Game Theory? You are playing Rock Paper Scissors. Which do you choose? You sell a product that is very similar to your competitor. Do you: Price low to steal his customers? Price the same? Price higher? You need to invest in a factory to create your product 8. Types of Games Sequential vs. Simultaneous Sequential: Chess, Checkers, Tic-Tac-Toe Solvable Game tree solution Simultaneous: Rock Paper Scissors Solvable Equilibria solutions Most business problems are simultaneous (or very close to it) rather than sequential Our focus will be simultaneous, 2 player games 9. Brain Teaser Cut the Cake Two twin brothers have gotten a cake from their parents for their birthday. What is the best way for them to split it so they are both happy? 10. Rock, Paper, Scissors This is a game RockPaperScissorsRock0,00,11,0Paper1 , -10,00,1Scissors-1, 11,00,0So, who cares? This is a boring game but its here as an example for more interesting ones Still interesting to note: Symmetric Zero SumSo how do I read it? The first number in each pair is the payout for the row player the second is for the column 11. Rock, Paper, Scissors RockPaperScissorsRock0,00,11,0Paper1 , -10,00,1Scissors-1, 11,00,0So, again, I ask, who cares? RPS is a classic example for a zero sum, symmetric game Zero sum: Winning is done at the expense of the loser Symmetric: Identical options with identical payoffs exist to all players 12. Lets Play! Find a partner and play Rock, Paper, Scissors!RockPaperScissorsRock0,00,11,0Paper1 , -10,00,1Scissors-1, 11,00,0 13. What have we learned? Does RPS have much in common with real business problems? Whats the best strategy for playing RPS? 14. Prisoners Dilemma A classic! Probably most famous game in Game Theory We are going to spend some time here, so get comfy 15. So, whats the big deal? (positive payoffs are desirable)Shut upSnitch!Shut up3,30,5Snitch! 5 , 01,1 Two burglars are busted and put in separate rooms Police interrogate and promise the first one to snitch a deal Now, things get interesting. What would you do? 16. Equilibrium (positive payoffs are desirable)Shut upSnitch!Shut up3,30,5Snitch! 5 , 01,1 The problem should be clear Everyone would be better off shutting up but each individual would rather snitch Therefore, the Nash Equilibrium (and therefore the result of the game if played by rational, payoff maximizing players) is the sub optimal bottom right corner 17. What does PD apply to? Can you think of any real life scenario in which PD applies to? 18. A ton of them! Pricing/Promotions: We are selling a similar product; should I price low (and then steal share) or high? http://www.businessweek.com/articles/2013-1119/best-buy-and-the-holiday-retail-prisoners-dilemma Feature Wars In fact, most non-zero sum games in which cooperation yields more benefits than competing can be modeled like a PD game 19. So what do we do? The bad news: The solution to a standard, pure Prisoners Dilemma game is always mutual defection. Sorry. Its a cruel world. The good news: Reality is infinitely more complex; there are factors we can explore and ways to change the game IPD Collusion (dont do that!) Change the Game 20. Lets try something Pick your gaming partner Play the game! (positive payoffs are desirable)Shut upSnitch!Shut up3,30,5Snitch! 5 , 01,1 21. Show of Hands Who picked snitching? Why? Who picked shutting up? Why? 22. And now, a Twist! Play the game again. And again. And again. Until I tell you to stop. 23. Iterated Prisoners Dilemma An interesting result emerges when playing PD multiple times. Why? What if I told you that you had exactly 100 turns to play? Strategies: TFT, TF2TT Axelrods Successful Strategy: Clear Provocable Nice Forgiving 24. Collusion Careful! Im not a lawyer, but usually, this is illegal Excerpt from Cramton & Schwartz 2002 see table 1 at http://drum.lib.umd.edu/bitstream/1903/7061/1/cramton-schwartz-collusive-bidding.pdf (cant put table here for copyright reasons) 25. Change the Game What are other options to change the game? What if you locked the loot from the burglary with two keys? Examples from a Product Strategy perspective: Differentiation Consortiums (pooled standard ownership) Punitive clauses in contracts Price matching clauses (retroactive ones as well) Most favored customer clauses 26. Last One! Chicken! Swerve Drive on! Swerve Lose, LoseLose , WinDrive on!Splat! , Splat!Win , Lose Anti-cooperation game What are business analogies? How can you win? 27. Some interesting questions if we have time left You need to bid on ad keywords. Are you better off having keywords that are identical, or different from your competition? Do you think its better to ape your competitors features or remove them entirely? When you build a store location would you rather build it next to your competitor, or somewhere else? 28. Thank you! 29. Backup 30. Further Reading Art of Strategy: Dixit & Nalebuff Evolution of Cooperation: Axelrod Prisoners Dilemma: Poundstone