The Art of Strategy, written by Avinash K. Dixit and Barry J. Nalebuff, is one of those rare books that has a genuine impact on an individual's reality. To put it another way, it changes the way one sees the world, and as the "Guide to Success in Business and Life," it provides game theory as psychology and mathematics of social interactions in strategic solutions. According to the authors, game theory relates to strategic thinking. That is, it is the art of anticipating your opponent's next movements while fully aware that your opponent is attempting to do the same to you. Avinash and Nalebuff claim that whereas the parts of the game theory entail modest common sense, a lot is counterintuitive and thus can simply be grasped through the development of fresh approaches to seeing the world. They use wide-ranging rich case studies that encompass sports, pop culture, history, movies, TV and politics to reveal the fact that nearly every personal as well as business dealings has a game-theory constituent to it. Even so, the real life depictions of the game theory conceptions along with the decision-making scenarios are copious and amusing in their execution in equal measure. Examining the book reveals questions like do big-time venture capitalist see things that a majority of individuals miss? Are the victors of the reality-TV challenges intuitive theorists? What do great poker players know and typical individuals don’t? Whatever the answer, the mastering of the game of art as presented in the book, The Art of Strategy, makes one more successful in life and business as it is the key to that mastery.
Starting off with the use of numerous examples of games which are easily solvable by starting with the desired goal and working backward, the authors delve deeper into more complicated issues. Such issues include how to strategize when both players can move instantaneously when there are penalties for certain alternatives or how to optimize the state of affairs so that both players can get the best conceivable results through cooperation. The book notes that game theory is a study of decision making where participants have to make rational and optimizing selections which will as well influence the interests of the fellow player. In this case, it can be related to price discrimination where consumers are charged different prices for the same goods or services when there is different price elasticity of demand for the various consumer groups. This kind of situations is noted to incessantly rematerialize in life where some are entangled in struggle while others with co-operation. Therefore, the motive of the book is to realize a clear understanding of what the authors term as the ‘art’ of thinking strategically. In other words, being able to anticipate the next moves of the opponent with the assumption that they will try to do the same thing. For instance, in the optimal bidding strategy, an individual bids what he or she thinks is the next highest person’s value considering the belief that he or she has the utmost value. When the number of bidders rises, the market moves toward perfect competition where all the surplus goes to the seller. Besides, the game theoretical approach to decision making is applicable in a variety of aspects of life and the authors state their intent of writing the book as “we hope that you will emerge a more effective manager, athlete, negotiator, apparent or politician,” which as well subtly implies the intended broad audience of the book.
The authors begin by aiming to reverse their earlier work “Thinking Strategically” perhaps to incorporate the accumulated teaching experience and the latest developments. The introduction to the game of theory offers the readers a view of the discipline without assuming a prior knowledge of mathematics or economics. It contains three parts and fourteen chapters, with the introduction envisaging all as strategies and life as a stream of constant decisions. It proceeds to give examples of the art of strategic thinking by illustrating how issues come up in various situations. Ten tales of strategies are incorporated with the authors pointing out the effective, less effective and bad strategies that are used in the real-life games. Through the discussion of looking forward and reasoning backward, the book notes that individuals ought to anticipate where their initial decisions lead them and then should use the information backward to make calculations concerning the choice. Whereas chapter 4 centers on a beautiful equilibrium (Nash Eqb), taking note that there may lack a dominant strategy while there may be multiple equilibria, Chapter 2 to 4 focuses on the science of game theory bringing out various principles. The second part talks about strategies, starting with choice and chance in the approaches of an actor to avoid patterns in decisions, actions that change the game to make certain greater outcomes. This involves the establishment of credibility by commitment, promise as well as threat. In the final part, the authors consider the interpretation and manipulation of information, cooperation and coordination, bargaining, bidding, auction as well as application to political science through (electoral competition and rational voting).
A closer examination of the book and the game theory, in particular, reveals that the use of common sense can be mastered through the development of a fresh approach of viewing the world. Through the use of case studies, Avinash and Nalebuff reveal how almost all interactions with mutually conflicting self-interests has a game theory in it. For instance, it can be applied to the oligopoly theory, where individual firms tend to affect and are affected by the actions of other firms in the industry. In a concentrated market, there is no doubt that a move by one dominant firm, say concerning the price, impacts on the actions of the rival players on the same. This triggers various responses from the affected players to offset the balance. Even so, the use of game theory approach to competitive circumstances can make individuals or firms not only successful in business but their overall life. All the same, as claimed by the authors, various exciting insights in the book are derived from the latest developments of the behavioral game theory that integrates human psychology together with biases into the mix thereby adding a social element into the theory. As a consequence, the game theory as presented does much better in terms of dealing with the individual as they are rather than as we might like them to be.
The daily lives are complicated and as such there are a web of interconnected economic and social courses. Game theory is portrayed as one of the heuristics which might help in the grappling with increasing life intricacies. However, while it has one specific interpretation concerning the world, it is not the only one, and neither is it the best. Game theory has limitations. The theory does not guarantee success, and the book’s definition of success makes it clear. While the book does not offer solutions as such, it takes note that solutions are temporary at most and that the processes of life tend to move on and fresh challenges reemerge. Also, Georgina postulates based on the proposition that regardless of the game and the settings, there is always an approach that enables one to thrive. In other words, whether one is formulating a business strategy to upsurge market share, negotiate salaries or bidding in an auction, rules always apply however intangible and elusive they may tend to be.
Key Insights Learned
Instead of confessing or not confessing, individuals should contribute to the common good. This captures a range of circumstances described in economics as the public goods problem. For instance, the construction of a bridge is best for everyone if built but best for each when somebody else constructs the bridge. This is occasionally denoted in economics as an externality. The same way, the game can describe the alternate of two companies competing for a common market, and instead of confessing or not, the strategies can be labeled as setting a higher price and setting of a lower price. It is natural for both companies to set high prices but in the same way, best for each company to set a low price while the rival sets a higher price.
The principle of looking ahead and reasoning back determines the equilibrium shares. Through bargaining of say two players, it is obvious that each would want a bigger share. Both would wish to reach settlement sooner rather than later and when they make offers in turn, the principle set in and agreement is reached. The player lacking patient gets a smaller share.
Game theory has revolutionized economics by tackling the significant glitches in prior mathematical economic models. For example, the neoclassical economics found it hard to comprehend entrepreneurial expectation and could not handle imperfect competition. The game theory shifted the consideration from the stable state equilibrium towards the market process.
In the game theory, each and every decision maker ought to expect the response of the impacted parties by the resolution. In the economic perspective, it means the economic agents should envision the responses of opponents rather competitors, even employees, investors, and customers.
Economic Methods Used
Price discrimination- this strategy charges customers dissimilar prices for the same product or service. There are three forms of price discrimination which are first-degree, second-degree and third-degree price discrimination. Alternatively, identified as the perfect price discrimination, the first degree transpires in the event company charges a dissimilar prices for every consumed unit. Second-degree price discrimination refers to the charging of varying prices for diverse quantities while a third degree is the charging of diverse price to different customer groups.
Marginal cost- the extra cost sustained as a result of the producing one additional unit of a good or service. It comes from variable cost since fixed costs do not change with the change of outputs and therefore no extra fixed cost is incurred in the production of an extra unit.
Perfect competition- the situation in which buyers are sellers are numerous as well as well informed that there are no constituents of monopoly and the market price of a commodity is governed by the supply and demand factors. This case produces the best possible outcome for consumers and the overall society.
Oligopoly- as a market structure where a few companies dominate is said to be highly concentrated. The game theory provides numerous insights into the behavior of oligopolists. As discussed by the authors, it indicates that the generation of rules for behavior may take various risks out of competition such as the deploying of a simple cost-plus pricing method shared by all participants. This is best for situations where oligopoly players share identical costs. It may as well be implicitly agreeing on a price leader with the other participants following. The analysis of game theory has a direct correlation to the study of the behavior and conduct of firms in oligopolistic markets.
Price elasticity of demand- is an economic measure that shows the sensitivity or elasticity of the quantity demanded of a good or service to a change in price. The term is often used in the discussion of price sensitivity. When a lesser change in price is accompanied by a big change in quantity demanded, the product is said to be elastic. On the contrary, a product is inelastic if a huge price change is go along with with a small change in quantity demanded.
Bibliography
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Dixit, Avinash K, and Barry J Nalebuff. The Art Of Strategy. 1st ed. New York: W.W. Norton & Co., 2010.
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