Page 64 - BA1 Integrated Workbook STUDENT 2018

Chapter 6

Game theory

In many markets the organisation’s decision on what strategy to adopt is often
dependent on the actions of its rivals. Game theory is concerned with the
interrelationship between the competitive moves of a set of competitors.

Imagine two companies, A and B, who both dominate a market. Both are
considering increasing their marketing expenditure. If either company
invests in additional marketing they will see a significant return. If both
companies invest in additional marketing, they will both make a loss.

What do the two companies do? Options include:

 launching a marketing campaign first – this may put off the rival from
following suit as they will now make a loss doing so

 some degree of collusion between the two companies to maximise
their overall returns – though care would need to be taken that this
was not in breach of anti-competition legislation.

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