How can companies use Game Theory IN PRACTICE to be more competitive?
Can you give real examples? Two critics people make about Game Theory
are that: 1) it is too complex to be used in practice and 2) people dont
behave rationally. So, how and when a company will use the concepts in
real life? Most schools teach math models and economics theory only. But
how a company will use that in decision making process and to be competitive?

Scientific American had a great article on game theory a while
ago...you may want to try searching on their site for it.

Hi,

I believe a lot of companies already use game theory in practice. Here
is an example: PRICE MATCHING.

Imagine that A and B are selling the same product. There are 100
customers. A and B can both price high or price low. If A prices high
and B prices low then B gets all the customers and vice versa. If both
companies price high, then they would both split (high) profits
equally, and if they both price low then they would both split (lower)
profits equally.

However, neither company knows what the other will do, when it makes
its own decision.

If A prices high and then finds that B has priced low then A is in
trouble.

So it is the dominant strategy (safe thing to do) to price low.

If A prices low then whatever B does, A will not get left in the lurch
with no customers at all.

Thus, both companies are forced to price low and get lower profits.

This is an example of the PRISONERS' DILEMMA.

But there is a way for the companies to get out of this dilemma. That
uses PRICE MATCHING.

A says that it will match B's price. And then A is sure that it will
get customers even if A charges high and B charges low, because the
customers will simply buy from A at B's (lower) price.

So now A can price its product high, without worrying about B's price.

The same argument applies to B as well.

Both companies now charge high and equally split (higher) profits.

They have broken out of the prisoners' dilemma.

Thanks,
Arindam Chakrabarti

I was GM for a service-based company from 1997 to 2002 (not high
tech).  Highly specialized employees required.  Prior to ultra low
unemployment rates in 2000, already difficult to find adequate numbers
of such individuals because 1) no formal university program as yet
available to generate fresh blood and 2) geographic locale had high
cost of living and qualified individuals became less and less willing
to move to this more expensive locale.  Local competition for such
individuals was extremely fierce, with hundreds of companies needing
the same types of employees.  Three major shifts occured in response
to market pressures: 1) salaries spiraled upwards, 2) companies had no
source of new head count other than to steal from the next guy down
the street, and 3) all companies were forced to use some "bottom of
the barrel" people.  Partial solution came from Game Theory.  I worked
with 7 key players (companies) in the area to 1) agree to not steal
from one another and 2) cap salaries for certain key jobs, already out
of control.

Most companies - and indeed people, organizations, governments etc. -
use game theory all the time without even being aware of it. Here's an
example: a soccer player doing a penalty kick will tend to aim about
50% of his kicks to the left side of the goal and 50% to the right
side. This is not because he studied game theory and knows that this
is his maximin strategy, but because he understands intuitively that
if he concentrates most of his kicks on one side of the goal, the
goalkeeper can take advantage of this to increase his chances of
stopping the ball.

Other examples are stated in the comments above. What I'm trying to
say is that game theory is more a theory that helps us understand
broadly why people/companies behave the way they do, rather than some
kind of computational tool with which we can somehow calculate optimal
strategies. Real life problems are usually too complex and include too
many unknown variables to actually model using game theory. But by
making highly simplified models, we can use game theory to gain some
insight about what will happen in the real-life situation.

With that said, I have read that game theory was used by governments
to model situations of conflict such as during the cold war. Certainly
that was one of the historical driving forces behind the development
of game theory, I don't have a good reference but if you look into the
biographies of people such as John von Neumann, the founder of game
theory, you will find ample evidence to that effect.

Regards,
dannidin

When I was in college (early 80s), several courses were practical in
dealing with areas which may provide information guiding you in a
direction without providing a complete answer:  microeconomics,
modeling & simulation.  In the area of oligopolies (a small number of
competitive companies in the same industry; remembering they are
competitive so they cannot be a cartel and if there were any more than
a handful, they could not be an oligopoly).

I didn't get onto the 'net until '86 or '87, so we had to rely upon
creating our own algorithms long-hand - so I know they do exist. 
Anyway, it *is* possible to determine the effect of a company altering
their price, how long it will take for the other companies belonging
to the oligopoly to react, how much they'll change their price, etc. 
You cannot determine which company it is because at times, they're all
equal companies until their actions differentiate them.

Lfobarri,

I absolutely agree with everyone. Game theory is already used by many
companies.  The theory is passed into practice via business schools,
which many tools and models (especially in competitive strategy)
taught are based (in part) on game theory.  Also consultancies such as
McKinsey base at least some practice in these theories.

Claudietta

An interesting review of a publication on game theory and practice in
business is available at
http://www.alumni.hbs.edu/bulletin/1997/october/theory.html

In an article reviewing "Games Businesses Play" by Pankaj Ghemawat,it
reads in part "Whether or not game theory has applications for
business strategy remains unclear - to date, empirical studies have
been too limited to yield any definitive conclusions. In Games
Businesses Play: Cases and Modules, HBS professor Pankaj Ghemawat
addresses this knowledge gap, using detailed, longitudinal analyses of
competitive interaction to explore the uses and limits of game theory
as a tool for students of business strategy."

I would have liked to answer your question, but the resources for the
examples you seek don't seem to be present for referencing on the
Internet.

You should search out old books ('60s) on "Operations Research" - the
"old" name for game theory applied to business. One I had gave many
practical examples of how it was applied to diverse industries,
including - from memory - whaling (where it showed there were two
minima in the fishing stock curve) and airline flying (which led to
the solution of flying more planes safely in crowded airspace). I
found it a fascinating subject. There are many internet sites on OR.