Text of Thinking about thinking: Cognition, Sensemaking, Irrationality, Rationality and Game Theory...
Thinking about thinking: Cognition, Sensemaking, Irrationality, Rationality and Game Theory Knowledge and Sensemaking
Bush at a kindergarten reading, receiving first notification that the WTC has been attacked
Vacationers at Phuket exploring exposed beach from quake induced inverse-tide
Vacationers at Phuket: Tsunami from second biggest earthquake in the world on record. Immediate casualties: 232,000, still missing: 46,000
Wave Arriving at Phuket Beach Resort: Recovered Photograph
Caf in Phuket Time Magazine Recovered Photo
Common Economic Assumptions Rational Actors are assumed to: 1) Be unboundedly rational 2) possess limitless appetites for utility 3) Purely self interested
Game Theory: Game theory attempts to mathematically capture behavior in strategic situations, in which an individual's success in making choices depends on the choices of others. Map of WWII Game Theory Application Game Theory Application Game Theory Introduction Game Theory Introduction
Power We usually associate game theory with competition, but it also is fundamental in customer/supplier/substitution and new entrants.
Game Theory Important Points (to remember): Participants Added Value RulesTacticsScope Also: *Commitment: (at least perceived) *Strategic Interaction *Strategic Interaction
Participants: Whos In? It matters: Aspartame (Nutrasweet) 1965 Chemist making Lspartic acid licks his fingers 1970 Patented 1983 USDA approved for beverage use 1987 and 1992 patent expiration date for US and EU. 1986 Holland Mining Co builds Aspartame Plant all manufacturers want at least two suppliers. 1987 Aspartame price falls from $70/lb to $20/lb 1990 Coke and Pepsi sign supplier contract with Monsanto (Nutrasweet manufacturer) 1992 Holland plant near nothing sales to US market. Who Won?
You: are a new sales rep at Pratt & Whitney, selling engines to plane manufacturers. You make standard 2% commission (one 737 engine costs about $4 million). Youre hoping to sell two engines this year. Boeing-your competitors main customer calls you. What are you going to do?
Your boss is going to kill you. Why?
Two daysweeks.months later, Boeing hasnt returned any calls or spoken to you. because they shopped you. because they shopped you. Boeing went to their supplier with your bid. They only went to you for a price. Your other long term customers have heard that Boeing got a sweetheart price. Your competitors think you are trying to price compete, so are going to retaliate. Nice work hero!
Player Gaming Continued Eight Hidden Costs of Bidding: 1. There may be better uses of your time. 2. When you win the business, you lose money. (price sensitive customers) 3. Your competitor can retaliate. 4. Your existing customer will want a better deal. 5. New customers will use the low price as a benchmark. 6. Competitors will use the low price as a benchmark 7. It doesnt help to give your customers competitors a better cost position 8. Dont destroy your competitors glass houses
Player Gaming Continued Your presence in a competitive situation is valuable: you dont need to give it away Ask for contributions up front Ask for a guaranteed sales contract Ask for better access to information Ask to deal with someone who will appreciate what you bring to the table Ask to bid on other pieces of business in addition to the current contract Ask the customer to quote a price at which he will give you his business
Added Value: What are you bringing to the table? This is where we usually screw up: Underestimating our added value Overestimating our added value BATNA? Comes from this
Added value Prize: University sets up a deal worth $2600 They will give us $100 for each red/black pair of cards Rules: 1) Card holders bargain iteratively on individual basis. (you dont communicate with other card-holders) 2) One person holds 26 black cards. 3) 26 people hold one red card. 4) You negotiate to get the black card holder to give you money for your red card. 5) If they dont buy your card, they get nothing. 6) If you dont sell your card, you get nothing.
Added Value-New game Whats different? Prize: University sets up a deal worth $2600 They will give us $100 for each red/black pair of cards Rules: Card holders bargain iteratively on individual basis. Card holders bargain iteratively on individual basis. 1) One person holds 23 black cards (she threw away three cards) 2) 26 people hold one red card. 3) You negotiate to get the black card holder to give you money for your red card. 4) If they dont buy your card, they get nothing. 5) If you dont sell your card, you get nothing.
Added Value Under Supply Oversupply: each customer has added value Undersupply: each has no added value: Examples of Monopolies/Intentional Undersuppliers OpecDeBeersNFL
Rules Find out what they are, change them to your advantage if you can. 1. Take it or leave it offers 2. Last look provisions 1. + Reduces incentive for competitors to bid 2. + Takes the Guesswork out of bidding 3. + Lets you decide whether customer is worth keeping 4. - Allows competitors to bid without having to deliver
Tactics 1. Offer 1 st Class guarantees if you offer 1 st class service or products 1. + Communicates the excellence of your offerings 2. + Inferior competitors can not match your commitment 3. + Communicates to your organization the importance of quality 2. Complex Pricing Schemes : 1. + Hide high prices 2. + Disguise opportunistic pricing 3. + Hide low prices too preserving an image of quality 4. + Hamper comparison shopping 5. - Increase administrative costs 6. - Confuse and frustrate customers