ABSTRACT
Introduction When a firm performs a new game activity or any other activity, its competitors are likely to react to the activity. For example, if a firm introduces a new product, lowers or raises its prices, launches a new ad campaign, increases R&D or marketing spending, enters a new business, boosts manufacturing capacity, builds a new brand, or performs any other activity, its rivals are likely to respond sooner or later. Thus, how successful the firm is with the new activity is a function not only of how the firm performs the activity but also of competitors’ reaction. Thus, before taking a decision, a firm may want to consider its competitors’ likely actions and reactions. In particular, the firm may be better off asking itself questions such as: How are my rivals acting? How will they react to my actions? How best should I react to my rival’s reaction to my actions? If the rival moves first, what should I do? A useful tool for exploring some of these questions is game theory. Game theory enables firms not only to ask what their competitors are planning to do but also to ask what is in the best interests of these competitors. In this chapter, we explore how game theory can be used to explore some of these questions. Because this book assumes no prior knowledge of game theory, most of this chapter is dedicated to reviewing some of the key concepts of both cooperative and noncooperative game theory that are important to understanding value creation and appropriation.
