Case breakdown: Movie A Beautiful Mind
The above scene is from the movie, ‘A beautiful mind’. This movie is based on the life of mathematician John Nash. In this particular scene, John Nash’s four friends are eyeing the beautiful blonde girl.
While the blonde girl is looking at Nash, in that moment Nash observes and contradicts Adam Smith’s Neo- classical theory and figures that if two rational people were to collaborate with each other, they have a win-win situation (in this case getting the blonde girl). If they operate from a self-centered perspective, they won’t reach an optimal outcome. This theory is based on logical deduction and emotions don’t play a role here. John Nash had a breakthrough in this theory and wrote a 32 page paper when he was 21.
What is Game Theory?
Game theory, today forms part of curriculum, it is an integral part of Economics, Operations research, Business administration, Mathematics, Psychology and many other management subjects. Game theory deals with making optimal decisions and choices based on relationship with others.
Game theory is science of decision making. It is used in International relations and Military training as well. Professor John Von Neumann and Oscar Morgenstern had published their book on ‘The theory of Games and economic behaviour’ developing game theory. John Nash developed Nash Equilibrium. He was awarded Nobel Prize in 1994 for his work. Nash Equilibrium is a concept in game theory, It suggests that no decisions are taken in isolation and a player cannot change it’s decision without being in agreement with the other player.
Typical example to understand game theory is Prisoner’s dilemma. It states that if two prisoners think to protect themselves at the expense of the other, an optimal solution wouldn’t be reached. However, if these prisoners use the idea of collusion and collaboration, they can reach a solution that’s beneficial to both parties.
Similarly in businesses, two related companies in the same industry might follow the collaboration strategy while fixing their prices so that each can share margins, without this, both firms stand to loose. Think Burger King and McDonald in the food and beverage industry, they both fix prices for their products which are in close range to each other.
Let’s understand this through a real-life example of Airline industry. Aviation industry is an industry that has high barriers to entry and is highly regulated by the government. In 2003, Air Deccan, a low cost carrier came into being. It started offering approximately 30% lower fares compared to other airline fare tickets. It had reduced its operational costs by simplifying their operations lead by Dr. Gopinath. His vision was to target growing middle class population of India. Reducing turn around time, dynamic pricing, additional revenues, unconventional distribution system were some of the strategies that the airline resorted to. As Deccan offered lower air fares, big players (Jet airways and Indian Airlines) were forced to bring down their prices to retain market share. More low cost careers rose such as Indigo, Spice Jet etc who started following similar strategies such as Air Deccan. This led to everyone losing market share including Air Deccan. Airline industry was fast losing its pricing war.
Nash equilibrium occurs when players in the industry work together and each earn their market share following similar pricing strategy, if one player does not act in accordance everyone tends to lose. In 2007, Kingfisher took over Air Deccan. All other players were happy with this takeover as equilibrium had to be restored in the Airline industry.
Written by: Ms. Gitika Chandra