Class 13 Take Aways

The Practice of Game Theory

This class was all about translating the ideas of game theory into practice. In GE v Westinghouse, we saw how GE was able to use simple measures to create price discipline in the market. Specifically, it made prices transparent both in its price book and in disclosing prices and orders. The idea here is to make cheating easy to detect.
It used a price multiplier to make punishment and reward easy to implement. It offered its customers price protection supported by an outside auditor to reduce the temptation to engage in price cutting. Finally, it forgave price transgressions from Westinghouse following a short punishment period. Westinghouse, seeing the virtues of this approach, embraced it by adopting the same "best practices."

This is a textbook example of practically solving a social dilemma.

In the browser wars case, MSFT faces a seemingly insurmountable problem--how to tip a market with network effects away from an incumbent with market power. The key for MSFT was to make its browser sufficiently attractive that new customers in this growing market would adopt it. To achieve this, Microsoft made a credible commitment to offer, in effect, a zero price for its browser and to eliminate hassle costs. It did this through bundling. In effect, MSFT leveraged its market power in operating systems to credibly commit to an aggressive strategy in browsers. This strategy was enormously successful. In just 4 years, MSFT tipped the browser market in its favor and more or less put Netscape out of business.

The broader lesson here is that outward thinking creates new uses for standard strategies like bundling. We've seen this theme several times already: the finance versus game theory value of an option, the accounting versus game theory value of an asset, and now the market versus game theory use of bundling. The ability to think strategically creates all sorts of new possibilities for the managerial tools introduced throughout your tenure as MBA students.