Game theory on Gold retailer strategies 1

Table of Contents
1. THE AIM OF THE REPORT................................................................................................................................2

2. INTRODUCTION TO GAME THEORY....................................................................................................... 2

3. HISTORY OF GAME THEORY................................................................................................................... 3

4. APPLICATION OF GAME THEORY IN BUSINESS.......................................................................................3

4.1 MODELLING...................................................................................................................................... 4

4.2 ANALYSIS.......................................................................................................................................... 4

5. CASE APPLICATION: GOLD RETAILING INDUSTRY, INDIA.........................................................................4

5.1 GOLD RETAILING............................................................................................................................... 4

5.2 COMPETITION SCENARIO.................................................................................................................. 5

5.2.1 GAME 1 : PRICE TAG INTRODUCTION................................................................................................ 6

5.2.2 GAME 2 : ADVERTISEMENT CAMPAIGN............................................................................................. 7

5.2.3 GAME 3: OUTLET EXPANSION........................................................................................................... 8

6. CONCLUSION........................................................................................................................................ 9

7. References.....................................................................................................................................................10

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Game theory on Gold retailer strategies 2
Word Count: 1995
(Excluding reference and
notes)

1. The Aim of the report

The report aims at providing a glimpse of the technique of game theory being applied in business to
formulate and analyse strategies to be or being implied in real world business. This is done with an
empirical case of the competition prevailing between two gold retailers in India and the strategies
used by both in catching market share as well as to keep the company growing strategically and
sustainably.

2. Introduction to Game Theory

“Game theory is rampant in economics. Having long ago invaded industrial organization, game-
theoretic modelling is now commonplace in international, labour, macro and public finance, and it is
gathering steam in development and economic history. Nor is economics alone: accounting, finance,
law, marketing, political science and sociology are beginning similar experiences. Many modellers use
game theory because it allows them to think like an economist when price theory does not apply.”
(Robert Gibbons 1997)

Definition: Game theory is a formal way to analyze interaction among a group of rational agents

who behave strategically. This definition contains a number of important concepts which are

discussed in order: Group: In any game there are multiple decision makers, who are referred to as

players. If there is a single player, the game becomes a decision problem. Interaction: What one

individual player does directly affects at least one other player in the group. Otherwise, the game is

simply a series of independent decision problems. Strategic: Individual players account for this

interdependence. Rational: While accounting for this interdependence, each player chooses her

best action …” (Mobius 2003)

Game theory is a branch of applied mathematics and economics that studies strategic situations
where there are several stakeholders, each with different goals, whose actions can affect one
another. Although it has been applied to complex business issues and military strategy, game theory
reveals its card-game origins through its name and terminology.

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Game theory on Gold retailer strategies 3

Consider the case of formula one drivers, Michael Schumacher and Fernando Alonso racing for the
chequered flag. The actions played by both drivers are to accelerate and be in front or to not
increase throttle and handle the situation. Schumacher can play a strategy by injecting more petrol
and overtake Alonso, when Alonso can either increase throttle or let Schumacher pass over avoiding
risk of accident at the turn. This can be explained upto a limit by game theory. But can it explain the
applications like constant acceleration behind Alonso and using vacuum suction 1 to speed down
Alonso to overtake him? Can this situation be predicted through game theory?
In general, the value of game theory lies in understanding the interactions and likely outcomes when
the end result is dependent on the actions of others who have potentially conflicting motives. Game
theory’s value to business lies in allowing structured analysis of complex multi-player issues including
the identification of a business’ best attainable outcome, threats and promises available to different
players and the prediction of the likely actions and reactions of other players.

3. History of Game Theory

Game theory is a well developed field of study that has attracted some of the world’s greatest
mathematicians, won two Nobel Prizes and is even credited with winning the Cold War. The origins
of game theory go far back in time. Recent work suggests that the division of an inheritance
described in the Talmud (in the early years of the first millennium) predicts the modern theory of
cooperative games and, in 1713, James Waldegrave wrote out a strategy for a card game that
provided the first known solution to a two player game.

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Game theory on Gold retailer strategies 4

4. Application of Game Theory in Business

Game theory with its focus on the interactions of multiple players, each trying to maximize their own
rewards, is a natural fit for many types of business issues. From labour negotiations to competitive
pricing, game theory provides a structured way to analyze the set of possible strategies and
recommend an optimal strategy for each player.
1 vacuum suction – driving technique used in formula one

4.1Modelling

Game modelling starts by simplifying the situation by building a model of it (i.e. a game). This is done
by translating the important features of the real situation into model assumptions (i.e. the rules of
the game). We determine players, actions, and resulting outcomes with payoffs, information and
communication conditions. (Robert Hoffman 2011)

Payoffs reflect utility, or satisfaction. Payoffs are numbers or converted to numerical format inorder
to make analysis and calculations easy.

4.2Analysis

Next step is to analyse the model for equilibrium (such as Nash Equilibrium) and efficiency (Pareto
efficiency). Nash equilibrium is the position resulting from everyone making their optimal decision
based on their assumptions about their rivals’ decisions. Without collusion, there is no incentive for
any firm to move from this position. (Sloman J etal). Pareto efficiency is the next step done, by
analysing whether the traced equilibrium outcome is good strategy for each by checking whether
either of the players can change decision without making the other player lose anything from the
current decision.

5. Case application: Gold retailing industry, India

There is a stiff competition among the gold retailers in India to catch the business. Before applying
game theory on some of strategies applied in gold retail business, let the report take you through an
outline ride of the industry and the situation prevailing in the region.

5.1 Gold retailing

Gold is considered to be the heavily invested arena just after stock exchange and oil exchange shares
by potential investors around the globe. When we consider the demand curve gold is one of the very
few commodities which follow a unnatural graph in trends with price change. When the gold price
increases in small amounts, the quantity of demand decreases gradually, but after a point, when gold

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Game theory on Gold retailer strategies 5

prices surge steeply, the quantity of demand also increases drastically due to high level of investment
interest for gold.

Price

Quantity demanded
(Normal commodity- Demand curve) (Gold – Demand curve)

Gold retailing is considered to be one of the most profitable and status boosting business in India.
Many of the companies invested in gold retailing get the gold jewels designed in Singapore and
London and import it to India and sell it off. But the state Kerala is famous for the gold artisans who
design their own traditional and new age designs. The gold retailers in this area so invest on
designing the jewels to diversify themselves from competitors in the gold market business.
India is the largest consumer of gold in the world. From 2007 Kerala has emerged as the largest gold
consuming state in India due to the large population of NRI 2 families. The prevailing condition of
giving dowry as gold in kilograms and premium luxury cars are the ongoing trends in the society. This
situation is highly made use of by the gold retailers in the region. The state is having a count of more
than 2000 small and big gold retailers and with more than 7000 retail outlets.

5.2 Competition scenario

The competition between gold retailers in Kerala is immense and can be analysed as the toughest in
rivalry when considered by a new entrant into this business. Price wars, open rivalry through
advertisements, outlet expansions and so on signal the core strategies and tools used to keep the
competition in a highly volatile style. The veterans in gold retailing in Kerala are Beta 3 and Sigma4.
The entry of Alpha5 into gold retailing recently has fuelled the fire of rivalry in gold retailing in the
region. Alpha is a famous textile retail brand in the region and the brand name is the main strategy
tool to catch business in this new business domain.

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Game theory on Gold retailer strategies 6

2 – NRI – Non Resident Indians

3 – Beta – Bhima Jewellers
4 – Sigma – Josco Jewellers

Game Notes:
5 – Alpha – Kalyan Jewellers

- Highest pay off for each player for a particular strategy.

- Equilibrium Outcome

- Pareto Efficient outcome

General Rules (Assumptions)

1. The players are rational and play for victory(profit or sales boost)
2. Action of the first player is known to the second player, through the market

3. The potential of the competitor to play a strategy is not known by any player

4. Customers also take rational decision in choosing the brand and the product.

5.2.1 Game 1 : Price tag introduction

THE ENVIRONMENT OF THE GAME

Players: 2 ( Alpha Jewellers and Beta Jewellers)
The Strategies(Actions) : a) Implement price tags in sales
b) Do not implement price tag
The payoffs: The increase in number of customers in a week. (Approximate)

Alpha
Price Tag No Price Tag

5000 , 3000 7000 , 1000

Price Tag

Beta

3000 , 4000 7500 , 500

No Price
Tag
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Game theory on Gold retailer strategies 7

Review of the outcome

The introduction of price tag displays the details of design cost, design waste cost and so on for each
design, which gives clear information to customer to differentiate between jewels from various
brands. As per the analysis it is found that to introduce price tags by Beta if Alpha does so is the
outcome in equilibrium and with efficiency. In real world, when Alpha introduced price tag for first
time in market, lot of customers rushed to the brand, which resulted in a heavy fall in Beta’s sales.
Beta did not introduce tags, but displayed in shops that “Jewels sold from Alpha won’t ever be taken
here for exchange”, which made customers understand that Alpha used tag introduction just for
boosting sales. But with time, customer’s understood that even Beta was selling same(with same
design cost) jewels without tags, customers shifted to Beta due to the long history of trust and brand
equity.

5.2.2 Game 2 : Advertisement campaign

THE ENVIRONMENT OF THE GAME
Players: 2 ( Alpha Jewellers and Beta Jewellers)
The Strategies(Actions) : a) Screening advertisement in Television channels
b) Posting advertisement in newspapers
The payoffs: The ranking of attraction and customer pull after experiencing the advertisement.
1. Least attracted to the brand and the advertisement
2. Medium attraction to the brand and the advertisement
3. Very high attraction to the brand and the advertisement

Alpha
TV Advertisement Paper advertisement

3 , 3 3 , 2
TV Ad

Beta

2 , 3 1 , 1
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Paper Ad
Game theory on Gold retailer strategies 8

Review of the outcome

The result of the analysis is perfectly suiting the real life business market. Jewelleries Alpha and Beta
are now spending more than £250 for a 20 second advertisement in television to keep the market
shares stable and growing following a tit for tat strategy. News paper advertisements are falling less
in numbers compared to television advertisements of gold retailers.

5.2.3 Game 3: Outlet expansion

THE ENVIRONMENT OF THE GAME

Players: 2 ( Alpha Jewellers and Beta Jewellers)
The Strategies(Actions) : a) Planning and opening a new jewellery showroom(outlet)
b) Not planning for a new outlet
The payoffs: Percentage increase (in a month) in overall sales of the company after the action

Alpha
New Outlet No New Outlet

20 , 15 30 , 5
New Outlet

Beta

10 , 15 10 , 5

No New
Outlet

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Game theory on Gold retailer strategies 9

Review of the outcome

Opening a new showroom by Beta, if Alpha does so, or vice versa is the best efficient equilibrium
positioned strategy as per the results of the game. But Alpha being a big player in textile retail has
very high investment potential than Beta. So the capital reserve, land and space availability in the
competition location and so on also need to be considered when this strategy is to be worked out. So
the result is not always effective or easy to implement.

6. Conclusion
Game theory as a tool of analysing and formulating strategies in business is beneficial, but depending
on many other factors which are to be encountered in real world business. The real life games
simulated in this report clearly proves the effectiveness and limitations of game theory as a
application tool in business strategies. In conclusion, business is a game with strategies, but to be
played with the best strategy and to be successful is not in the hands of theories, but of the real skill
of a human brain with tactical extravaganza.

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Game theory on Gold retailer strategies 10

7. References

1. “Fears over purity of gold ornaments- News” [online]. Available at

http://www.thehindu.com/todays-paper/tp-national/tp-kerala/article2133747.ece?css=print
(Accessed 26th December 2011)
2. “Gold’s own country- News”[online]. Available at http://indiatoday.intoday.in/story/kerala-
and-gold-in-the-state/1/130234.html (Accessed 26th December 2011)
3. “History of game theory” figure [online]. Available at: http://en.wikibooks.org/wiki/A-
level_Economics/AQA/Markets_and_Market_failure (Accessed 26th December 2011)
4. “Strategic Behaviour in Business and Economics”[online]. Available at
http://fawlty.uab.cat/Strategic/Strategic_Behavior_in_Business_and_Economics/Home_files
/Memo2.pdf (Accessed 28th December 2011)
5. J,Sloman. K,Hinde. D,Garratt(2010)., Economics for Business (5th Edition). Essex: Pearson
Education.
6. Open options corporation.(2007) “Introduction to game theory History of Game
Theory”[online]. Available at: http://www.rotman.utoronto.ca/icpm/open
%20options_introduction_to_game_theory.pdf (Accessed 24th December 2011)
7. R,Eric. (2007) “Games and information: An introduction to game theory”, ebook [online].
Available at: http://books.google.co.uk/books?
hl=en&lr=&id=5XEMuJwnBmUC&oi=fnd&pg=PR11&dq=game+theory+procedure&ots=T-
Zgni8JHD&sig=5h-ovPzQ6o6u9yov-fISx12ZQY8#v=onepage&q=game%20theory
%20procedure&f=false (Accessed December 26th 2011)
8. S,Robert.(2007)” Industrial Economics for Strategic Decisions”[online]. Available at:
http://web.mit.edu/rpindyck/www/Courses/GT_05a.pdf (Accessed 24th December 2011)

Hara Two Abdul Rasheed : 4165138 MBA - Business Economics Coursework