Thinking about thinking: Cognition, Thinking about thinking: Cognition, Sensemaking, Irrationality, Rationality and Sensemaking, Irrationality, Rationality and Game TheoryGame Theory

Knowledge and SensemakingKnowledge and Sensemaking

Oh Yeah!Oh Yeah!

Bush at a kindergarten reading, receiving first Bush at a kindergarten reading, receiving first notification that the WTC has been attackednotification that the WTC has been attacked

Vacationers at Phuket exploring exposed Vacationers at Phuket exploring exposed beach from quake induced inverse-tidebeach from quake induced inverse-tide

Vacationers at Phuket: Tsunami from second biggest Vacationers at Phuket: Tsunami from second biggest earthquake in the world on record. earthquake in the world on record.

Immediate casualties: 232,000, still missing: 46,000Immediate casualties: 232,000, still missing: 46,000

Wave Arriving at Phuket Beach Resort: Wave Arriving at Phuket Beach Resort: Recovered PhotographRecovered Photograph

Wave Arriving at Phuket Beach Resort: Wave Arriving at Phuket Beach Resort: Recovered PhotographRecovered Photograph

Café in Café in PhuketPhuket

Time Magazine Time Magazine Recovered Recovered PhotoPhoto

Common Economic AssumptionsCommon Economic Assumptions

““Rational Actors” are Rational Actors” are assumed to:assumed to:

1)1) Be unboundedly rationalBe unboundedly rational

2)2) possess limitless possess limitless appetites for utilityappetites for utility

3)3) Purely self interestedPurely self interested

Game Theory:Game Theory:

Game theory attempts to mathematically Game theory attempts to mathematically capture behavior in capture behavior in strategic situationsstrategic situations, in , in which an individual's success in making which an individual's success in making choices depends on the choices of others.choices depends on the choices of others.

Map of WWIIMap of WWII

Game Theory Application

Game Theory Introduction

PowerPower

We usually associate game theory with We usually associate game theory with competition, but it also is fundamental in competition, but it also is fundamental in customer/supplier/substitution and new customer/supplier/substitution and new entrants.entrants.

Game TheoryGame Theory

Important Points (to remember):Important Points (to remember):ParticipantsParticipantsAdded ValueAdded ValueRulesRulesTacticsTacticsScopeScope

Also: *Commitment: (at least perceived)Also: *Commitment: (at least perceived) *Strategic Interaction*Strategic Interaction

Participants: Who’s In?Participants: Who’s In?

It matters: Aspartame (Nutrasweet)It matters: Aspartame (Nutrasweet)1965 Chemist making Lspartic acid licks his fingers1965 Chemist making Lspartic acid licks his fingers1970 Patented1970 Patented1983 USDA approved for beverage use1983 USDA approved for beverage use1987 and 1992 – patent expiration date for US and EU.1987 and 1992 – patent expiration date for US and EU.1986 Holland Mining Co builds Aspartame Plant “all 1986 Holland Mining Co builds Aspartame Plant “all manufacturer’s want at least two suppliers.”manufacturer’s want at least two suppliers.”1987 Aspartame price falls from $70/lb to $20/lb1987 Aspartame price falls from $70/lb to $20/lb1990 Coke and Pepsi sign supplier contract with 1990 Coke and Pepsi sign supplier contract with Monsanto (Nutrasweet manufacturer)Monsanto (Nutrasweet manufacturer)1992 Holland plant near nothing sales to US market.1992 Holland plant near nothing sales to US market.

Who Won?Who Won?

You:You:

are a new sales rep at Pratt & Whitney, are a new sales rep at Pratt & Whitney, selling engines to plane manufacturers. selling engines to plane manufacturers. You make standard 2% commission (one You make standard 2% commission (one 737 engine costs about $4 million). You’re 737 engine costs about $4 million). You’re hoping to sell two engines this year.hoping to sell two engines this year.

Boeing-your competitors’ main customer Boeing-your competitors’ main customer calls you.calls you.

What are you going to do?What are you going to do?

Your boss Your boss

is going to kill you. Why?is going to kill you. Why?

Two days…weeks….months later, Boeing Two days…weeks….months later, Boeing hasn’t returned any calls or spoken to you….hasn’t returned any calls or spoken to you….

… …because they “shopped” you.because they “shopped” you.Boeing went to their supplier with your bid.Boeing went to their supplier with your bid.They only went to you for a price.They only went to you for a price.Your other long term customers have Your other long term customers have heard that Boeing got a sweetheart price.heard that Boeing got a sweetheart price.Your competitors think you are trying to Your competitors think you are trying to price compete, so are going to retaliate.price compete, so are going to retaliate.

Nice work hero!Nice work hero!

Player Gaming ContinuedPlayer Gaming ContinuedEight Hidden Costs of Bidding:Eight Hidden Costs of Bidding:1.1. There may be better uses of your time.There may be better uses of your time.2.2. When you win the business, you lose money. (price When you win the business, you lose money. (price

sensitive customers)sensitive customers)3.3. Your competitor can retaliate.Your competitor can retaliate.4.4. Your existing customer will want a better deal.Your existing customer will want a better deal.5.5. New customers will use the low price as a benchmark.New customers will use the low price as a benchmark.6.6. Competitors will use the low price as a benchmarkCompetitors will use the low price as a benchmark7.7. It doesn’t help to give your customers’ competitors a better It doesn’t help to give your customers’ competitors a better

cost positioncost position8.8. Don’t destroy your competitors’ “glass houses”Don’t destroy your competitors’ “glass houses”

Player Gaming ContinuedPlayer Gaming Continued

Your presence in a competitive situation is valuable: Your presence in a competitive situation is valuable: you don’t need to give it awayyou don’t need to give it away

Ask for contributions up frontAsk for contributions up frontAsk for a guaranteed sales contractAsk for a guaranteed sales contractAsk for better access to informationAsk for better access to informationAsk to deal with someone who will appreciate Ask to deal with someone who will appreciate

what you bring to the tablewhat you bring to the tableAsk to bid on other pieces of business in addition Ask to bid on other pieces of business in addition

to the current contractto the current contractAsk the customer to quote a price at which he will Ask the customer to quote a price at which he will

give you his businessgive you his business

Added Value: What are you Added Value: What are you bringing to the table?bringing to the table?

This is where we usually screw up:This is where we usually screw up:

Underestimating our added valueUnderestimating our added value

Overestimating our added valueOverestimating our added value

BATNA? Comes from this BATNA? Comes from this

Added valueAdded value

Prize: University sets up a deal worth $2600Prize: University sets up a deal worth $2600They will give us $100 for each red/black pair of cardsThey will give us $100 for each red/black pair of cardsRules: Rules: 1)1) Card holders bargain iteratively on individual basis. Card holders bargain iteratively on individual basis.

(you don’t communicate with other card-holders)(you don’t communicate with other card-holders)2)2) One person holds 26 black cards.One person holds 26 black cards.3)3) 26 people hold one red card.26 people hold one red card.4)4) You negotiate to get the black card holder to give you You negotiate to get the black card holder to give you

money for your red card.money for your red card.5)5) If they don’t buy your card, they get nothing.If they don’t buy your card, they get nothing.6)6) If you don’t sell your card, you get nothing.If you don’t sell your card, you get nothing.

Added Value-New gameAdded Value-New gameWhat’s different?What’s different?

Prize: University sets up a deal worth $2600Prize: University sets up a deal worth $2600They will give us $100 for each red/black pair They will give us $100 for each red/black pair of cardsof cardsRules: Rules:

Card holders bargain iteratively on individual basis.Card holders bargain iteratively on individual basis.1)1) One person holds 23 black cards (she threw away One person holds 23 black cards (she threw away

three cards)three cards)2)2) 26 people hold one red card.26 people hold one red card.3)3) You negotiate to get the black card holder to give you You negotiate to get the black card holder to give you

money for your red card.money for your red card.4)4) If they don’t buy your card, they get nothing.If they don’t buy your card, they get nothing.5)5) If you don’t sell your card, you get nothing.If you don’t sell your card, you get nothing.

Added Value – Under SupplyAdded Value – Under SupplyOversupply: each customer has added valueOversupply: each customer has added valueUndersupply: each has no added value:Undersupply: each has no added value:

Examples of Monopolies/Intentional UndersuppliersExamples of Monopolies/Intentional UndersuppliersOpecOpecDeBeersDeBeersNFLNFL

RulesRulesFind out what they are, change them to your advantage Find out what they are, change them to your advantage

if you can.if you can.

1.1. ““Take it or leave it” offersTake it or leave it” offers

2.2. Last look provisionsLast look provisions1.1. + Reduces incentive for competitors to bid+ Reduces incentive for competitors to bid

2.2. + Takes the Guesswork out of bidding+ Takes the Guesswork out of bidding

3.3. + Lets you decide whether customer is worth keeping+ Lets you decide whether customer is worth keeping

4.4. - Allows competitors to bid without having to deliver- Allows competitors to bid without having to deliver

Tactics1.1. Offer “1Offer “1stst Class” guarantees if you offer 1 Class” guarantees if you offer 1stst class class

service or productsservice or products1.1. + Communicates the excellence of your offerings+ Communicates the excellence of your offerings2.2. + Inferior competitors can not match your commitment+ Inferior competitors can not match your commitment3.3. + Communicates to your organization the importance of + Communicates to your organization the importance of

qualityquality

2.2. Complex Pricing SchemesComplex Pricing Schemes: : 1.1. + + Hide high pricesHide high prices2.2. + Disguise opportunistic pricing+ Disguise opportunistic pricing3.3. + Hide low prices too + Hide low prices too preserving an image of quality preserving an image of quality4.4. + Hamper comparison shopping+ Hamper comparison shopping5.5. - Increase administrative costs- Increase administrative costs6.6. - Confuse and frustrate customers- Confuse and frustrate customers