Barry Nalebuff on Business and Game Theory's "Prisoners Dilemma"
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Barry Nalebuff shares his thoughts on cooperation and competition in the business world.
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Barry Nalebuff:

Barry Nalebuff is the Milton Steinbach Professor of Management at the Yale School of Management. Professor Nalebuff has written on a wide variety of subjects ranging from strategy to pricing, bidding to bargaining, and innovation to incentives. He is an expert on game theory and has written extensively on its application for managers. His most recent book, The Art of Strategy, is an update of the best-selling Thinking Strategically, which explains the fundamentals of game theory using real world examples.

Professor Nalebuff's work on strategy focuses on the fundamental duality in business—the conflict between cooperating to create a pie and competing to divide it up—which he presents in Co-opetition. His book, Why Not?, focuses on providing a framework for problem solving and ingenuity. His work on product bundling was featured in the European Union's investigation of the proposed GE-Honeywell merger.
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TRANSCRIPT:

Question: How does game theory work in the business world?

Barry Nalebuff: The starting place is to appreciate what the larger game is. And that we’re often focused on competitive strategy, but actually there are many players that you have to appreciate your role with, not just competitors, but what’s the opposite of competitor, and that’s something you may call a complementer [sic], somebody who makes your goods and services more valuable, rather than less valuable.

Think about the relationship between Intel and Microsoft. They are not competing with each other. For customers, Microsoft without Intel isn’t worth much, and Intel without Microsoft isn’t worth much.

What’s interesting about that game is that there also in a little bit of a Prisoner’s Dilemma, but the opposite way that we normally think of. We normally imagine companies are worried about their rivals undercutting them and stealing market share, but here the problem for Intel and Microsoft is each of them is charging too high a price, not too little a price. So think about what cooperation means in a Prisoners Dilemma, nobody confesses, or in a cartel we all agree to keep our prices high.

But if Coke wants Pepsi to charge a lot and Pepsi wants Coke to charge a lot, but from Intel and Microsoft’s perspective, Intel wants Microsoft to be cheap because that stimulates the sales of computers. And Microsoft wants Intel to be less expensive. If they were to get together and agree on pricing, what would they do? They will actually lower their prices because I’m willing to lower my price if you lower yours because you’re lowering your price helps me, and I’m willing to lower my price in response. And so the collusive outcome in the case of complements actually is lower prices, more sales, higher profits and happier customers.

Question: How do contemporary businesses utilize game theory?

Barry Nalebuff: Normally to fold your cards reminded me of an example on the card business.

I think Hallmark [or] American Greeting Cards had done the study which convinced them that in-store printing of greeting cards was a disaster. That ultimately the cards weren’t very successful, it was too time consuming, it just wasn’t going to work.

They could have just folded their cards and walked away, if you like, but they actually left the impression of this was the best thing since sliced white bread, and they created that impression in the market to the point where American Greeting Cards decided to really run with it big time, and preempt them, and that let American Greeting Cards down to dead end.

There is another great example in the battle between Sky TV and British Satellite Broadcasting. This is not that different in the United States from our satellite radio; where there are two companies in the UK competing to see who is going to be the satellite TV broadcaster.

And the UK, it’s a big country but it’s not that big, there’s room for one, and so the question is, who is going to be the one company left standing at the end of the day? On one side was Murdoch, who was bringing the equivalent of Baywatch and shows that people like. And the other was the British Satellite Broadcasting, the BBC; this one is the establishment version, which was better funded, had more highfalutin content and the Her Royal Majesty’s approval.


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