Game Theory And Strategic Behavior Essay Sample

Game Theory and Strategic Behavior

Game theory is used in a competitive situation where an optimal decision needs to be made. This requires a strategy, which is the plan of action under the given circumstances (Camerer, 2010).If GE chooses to increase advertising so as to prevent MAYTAG from entering the market, it may succeed or fail in that strategy. MYTAG could also be considering the same and, in this case. If GE increases the advertising, MAYTAG gets little payoff since $0m<$1m thus it is not economical for MYTAG to enter the market. In this case, GE Company’s strategy works well, and MAYTAG cannot enter the market. The equilibrium outcome of the game is for GE to increase the advertising since $20m< $15m. This means that GE Company is more likely to achieve its strategy of preventing MYTAG from entering the market.
In the event that MAYTAG enters the market, an increase in advertising by GE of $2m will see more customers stop buying from MAYTAG since $2m>$1m which implies that it will be more efficient for GE to increase its advertising. This is an excellent strategy to keep MAYTAG out of the business since it will incur more in operating the company with low profits. This is evident because $35m> $15m which gives MAYTAG disadvantage of remaining in the market. For this reason, GE should increase advertising by $2m to prevent MAYTAG from entering the market. However, the additional cost of publicity by GE has the effect of reducing its profitability by $1.5m regardless of whether MAYTAG enters the market or not. For this reason, GE should not increase its advertising by $2m because it will get a less payoff.

References

Camerer, C. (2010). Behavioral game theory. New Age International.