Let’s Play A Game!

Today’s post is going to demonstrate how we can apply economic theory to marketing. If you are a student of marketing, then you may be familiar with Fishbein-Ajzen’s Theory of Reasoned Action (TRA).

This is similar. We are going to apply the Nash model of Game Theory to choosing and refusing to choose marketing. This is modeled closely from Nash’s “Prisoner’s Dilemma”, where a dominant strategy and Nash Equilibrium shows the players in the game what their best course of action may be.

Did I lose you yet? Good. Let’s call this problem the  “Small Business Dilemma.”

First, some assumptions:

1. We are assuming that they money the players (companies) do not use for marketing stays in the business.
2. We are assuming that the product the players offer is of the same industry, price, and quality.
3. We are assuming that the companies are in direct competition.

Here is the payoff matrix (Company B is the left number):

  Company A Does Marketing Company A Does NOT

Do Marketing

Company B

Does NOT Do Marketing

-1, 3 0,0
Company B Does Marketing 2,2 3,-1

What does this mean?

If Company B does not do marketing, Company A would rather do marketing, because it’s payoff is 3, rather than receiving 0 when not doing marketing. If Company B decides to do marketing, Company A’s best strategy is to do marketing, because it’s payoff is 2. Therefore, Company A’s dominant strategy is to do marketing. Because regardless of what Company B does, Company A’s payoff is greater when it engages in marketing.

Makes sense? Let’s examine Company B.

If Company A engages in marketing, it is Company B’s best interest to also engage in marketing, for its payoff is greater than otherwise. If Company A decides not to engage in marketing, it is in Company B’s best interest to engage in marketing, because again, its personal payoff is better than not doing it at all. Therefore, Company B’s dominant strategy is to do marketing. Regardless of what Company A does, Company B’s payoff is greater when it engages in marketing.

Game Theory is meant to examine the relationship between players in a certain, defined environment. This does not explain external factors, changes in strategy or product, and so on. But, it does give a glimpse of how and why businesses act a certain way. Let’s take Coke and Pepsi. Would one have benefited if the other stayed quiet? Absolutely not. Both Coke and Pepsi benefit more when they both engage in marketing.

What is also interesting in this problem, is that there are two boxes with similar values. When both players do nothing, they receive nothing. When both players engage in marketing, they both gain. Now when they both gain, that is what economists call the Nash Equilibrium, because it is in both players’ interest to engage in a certain activity. It is not in the players’ best interest to do absolutely nothing, because in this game, no payoff is awarded for latency.

The Point, So I Stop Boring You (if you made it this far)

Marketing and advertising is more than creating a brand, a personality. It’s strategy. It’s positioning. Knowing and learning how all the players in your industry moves is crucial to creating an effective strategy. Game theory is just all small piece of how you can achieve it.

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