Game Theory and Business Strategy

Ethics in Game Theory

Throughout this course, we will often highlight the strategic similarities between situations that arise in business and other activities, including sports, card games, and even evolution of species. In many cases, the theoretical underpinnings will be similar. Bluffing in poker, perhaps by flamboyantly tossing one's chips into the pot despite a poor hand, shares many similarities with bluffing about a firm's intentions to enter a new market simply to deter its competitors from doing the same. Crafty footwork by a football quarterback or penalty kicker in soccer to keep the other side guessing about his true intentions (run versus pass or kick left versus right) is identical, mathematically, to considerations of random audits by tax authorities or random drug testing of employees, also aimed at keeping tax payers or employees guessing about the chance of being caught.

However, ethical considerations differ. While deciving opponents in poker, football, or soccer, is often seen as part of the game, and the most skillful are rewarded with poker championships, Super Bowl rings, and World Cup trophies, the business world is unlikely to bestow similar accolades.

In this class, we will often take an amoral approach, seeing where the analysis takes us without direct consideration of the ethical questions. Game theory is a tool (much like net present value analysis, balance sheet accounting, or even algebra) which, in the hands of the practioner, may be used for good or foul ends. Consider an example that we will consider in class of how firms can cooperate for added profitability even when incentives exist for each firm to "cheat" securing it even greater profit. If the analysis is applied to price-setting, this consitutes collusion, a felony in most economies. However, while the analysis is sometimes used by firms to this end (OPEC, for example, has devoted much time to studying the game theoretic analysis of collusion), it is also commonly studied by antitrust regulators to better understand how to decrease the incentives for collusion. Alternately, equivalent mathematical analysis yields insights into how joint ventures should operate.

While the field we will study is termed game theory (a more accurate title of "the theory of strategic interaction" is much less alluring), and while the analysis of simple games often parallels analysis in business settings, we should not assume that the same is true for ethical considerations.