Game Theory

I read this on my friend Abhinav Sinha's blog (http://systemsview.wordpress.com/2010/09/28/the-game-theory/) and found this to be an interesting explanation.

Game Theory :

While driving around the India gate, have you ever wondered why most (if not all) ice cream vendors are stacked together in and around a small patch. Or that most highway ‘dhabas’ are located in clusters. Or maybe, next time when you fly out do check why various airlines schedule flights fairly close to each other, on a given route!

It comes to me as a surprise why would each one of them choose to operate in a zone of maximum competition. Maybe a possible explanation is that since the cluster is already frequented by a lot of potential customers, it makes sense for a new entrant to logically attach itself to the cluster, rather than someplace else, where he would have to invest in building customer traffic.

The question to be answered is how the clustering begins. What would the scenario be like if there was a unchartered territory and just two players in perfect competition. Does system thinking in any way influence the way, they would approach setting up their respective businesses.

Consider a scenario where the two ice-cream vendors A and B, who have to sell their products at similar pricing for sustenance, have to decide on where to locate themselves on a stretch of road, that will make perfect business sense.

To capture the sense of this example, imagine that customers are smoothly distributed all across the road and brand and price being the same for both A and B, they choose on the basis of sheer convenience and proximity.

Imagine that the two vendors ‘A’ and ‘B’ start by locating themselves at roughly a position shown above. It now appears to ‘A’, that they have a equitable access to business opportunity, since half of customers located between ‘A’ and ‘B’ will go to ‘A’ and the other half to ‘B’, depending on a convenient walking distance for them.

‘A’ turns out to be an aggressive competitor to ‘B’ and decides to move a 100 meters towards the center of the road so as to gain access to a share of ‘B’ customers while protecting his own share of customers (lying to his left).

To offset this, ‘B’ plays his own counter move and moves 200meters towards the center. Subsequently, ‘A’ moves 300 meters and this continues till both ‘A’ and ‘B’ are located right next to each other, at the center of the road.

Both A and B have created an equilibrium that stays even when a third player C enters the market. C has limited choice, but to locate itself within the cluster for survival.

This is of course until C weighs his payoffs and decides to locate at a niche location and offset the disadvantage by offering a discounted price to the customers. This of course will set up another un-equilibrium which in due course will be answered by the competition A and B.

The study of strategic decisions making process in an interactive environment is called ‘The Game Theory’.

Regards,

Sanjay