The position, as well as fully understanding

The term “Game
Theory” can be described as a mathematical analysis  in which has the intent of indicating optimal
choices that will lead to a desired outcome. The idea of game theory was first
explored by  John von Neumann and Oskar
Morgenstern in 1944. Game theory has been used as a management tool for more than
50 years. It helps to create a  structure
of analysis for making or arriving at logical decisions in competitive
environments. Businesses face optimal decisions on an everyday basis that
require some use of game theory. Game theory was originally zero sum games, in
which one person’s gain resulted in a lost for all other participants. It is
now more commonly used today for behavioral relations in assuming the next move
of a competitor. Understanding competitors and their position, as well as fully
understanding your own position and dealing with it accordingly, in any given
situation is ultimately the way of mastering game theory. Being able to
anticipate the next move of rivals, customers, and investors is essential when trying
to obtain a competitive advantage. The game theory has several applications
including: biology, psychology, politics, and economics, among others.

            In game theory each player  in the
“game” aims to apply a  strategy that will maximum their own gain
therefore seeking an optimal strategy. Those  involved in the game are considered players.
Each player will face a choice amongst two or more possible strategies. Optimal
choices are usually used in single-agent decision theories, with multiple agents
the best strategy will be contingent on the choices of others. Often time trees
and matrixes are used for visual representation of optimal choices in a given
situation.   It is assumed in game theory  that players are rational and strive to
maximize their own playoffs. Some solution concepts consist of dominant
strategy equilibrium, presto optimality, and Nash equilibrium.  Equilibrium is achieved when both players in
the game have made their decisions and an outcome is reached.

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            One
of the applications in game theory that directly relates to Operations
Management is the context of determining a location for a business. This is
done through the creation of an effective 
business strategy. Game theory forms a powerful tool for strategizing
how a business will compete in a given environment and position itself among
its competitors. The game theory may present a business owner with a detailed
strategic analysis that is essential in determining the best location for the
business. An analysis such as this provides accurate predictions of the
outcomes of a company in a given area by projecting how the action of the
business would affect the performance of competing firms. The game theory  considers  the potential effects of the rivals when
choosing the location for a business. A business owner must take all this into
account before determining a location for the business.  Firms 
first try to attract a location with potential in market share, and
quality that will be able to attract customers.(Hendrix,2015)  For example, there is a new electronics
store  debating  whether they should open a new store in downtown
Nevada. They are well aware of another electronics store that opened not too
long ago, and know that if they open there that will be a little bit of competition.
They are seriously considering this option because of the heavy traffic in Las
Vegas. The other option is to open the location in a city in  Texas. Where the competition isn’t bad , but
there’s a big demand for an electronics store in this area. The firm owner has
to now analyze the move of their competitors in order to determine a location
for this electronics store.

            The next application applies to economics which  is determining price.  In this context there are similarities to the
Prisoners Dilemma. The prisoners dilemma is a paradox used in decision
analysis. It shows why two individuals/corporations might not cooperate even if
it would beneficial for them to do so.

It’s used as a prison example,
to say if two parties were in separate interrogation rooms , both of the
individual in the party want to minimize their own jail sentences. Weighing out
which decision is more beneficial for the deciding party is a Prisoners
Dilemma. (Deng , 2010)  In this situation
operations managers face a similar strategy which is  price-setting to the Prisoner’s Dilemma. In a
situation where oligopoly exists, businesses can set prices if they decide to cooperate
with one another; thus, they can sell at higher prices
and receive higher profits. However, if one of the competing businesses decides
to lower their prices, they will achieve higher sales and earn larger profits
than its rivals. If all competing businesses decide to lower their prices, then
there will be a conflict in the market, and none of them will benefit due to
the reduced revenue.

            The last application
is inventory in game theory.  Inventory
is used as a type of protection against risk of stock being out when there is uncertainty
present. Grocery stores, for example have quick turnover with their inventory
in the meat department. The characteristics of perishable
products are those in which have a limited shelf life in which the overproduction
and storage of such products is not recommended.  In order for the business owner to know when
to re order inventory for such products they usually focus on rational system
planning, improved communication among the supply chain players,
well-coordinated and fast distribution channels and the clarification of
organizational goals. (Kumar , Mustafee , Katsaliaki, 2014). A store owner has to be able to
predict the demand of meat for the week or whenever there re-order point is,  based on previous sells and local competitors.
The firms relationship with their suppliers are vital for the business to
survive. A firm must order the right amount of inventory for the products
because failure to do so can  lead to the
meat expiring because it’s been on the shelf too long; or continuously running
out of meat before the re order point and having to spend an additional  fixed cost of redelivery for the week. There
are many other factors to consider when ordering inventory for perishable
items, but this is where firm owners need to start.

 

                                                                                                                                                                                                                                                         

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

References

Hendrix,
E. M. (2015). On competition in a Stackelberg location-design model with
deterministic supplier choice. Annals of Operations Research, 246(1-2),
19-30. doi:10.1007/s10479-015-1793-9

 

C.,
& Jingliang, C. (2010). Discussion on role of credibility failure
punishment cost in game between the government and the public—Model analysis
based on Prisoner Dilemma. The 2nd International Conference on Information
Science and Engineering. doi:10.1109/icise.2010.5690527

 

Katsaliaki, K., Mustafee, N., & Kumar, S.
(2014). A game-based approach towards facilitating

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