Knowledge and Sensemaking
Thinking about thinking: Cognition,
Sensemaking, Irrationality, Rationality and
Game Theory
Oh Yeah!
Bush at a kindergarten reading, receiving first
notification that the WTC has been attacked
Vacationers at Phuket exploring exposed
beach from quake induced inverse-tide
Vacationers at Phuket: Tsunami from second biggest
earthquake in the world on record.
Immediate casualties: 232,000, still missing: 46,000
Wave Arriving at Phuket Beach Resort:
Recovered Photograph
Wave Arriving at Phuket Beach Resort:
Recovered Photograph
Café in
Phuket
Time Magazine
Recovered
Photo
Common Economic Assumptions
“Rational Actors” are
assumed to:
1) Be unboundedly rational
2) possess limitless
appetites for utility
3) Purely self interested
Game Theory:
Game theory attempts to mathematically
capture behavior in strategic situations, in
which an individual's success in making
choices depends on the choices of others.
Map of WWII
Game Theory Application
Game Theory Introduction
Power
We usually associate game theory with
competition, but it also is fundamental in
customer/supplier/substitution and new
entrants.
Game Theory
Important Points (to remember):
Participants
Added Value
Rules
Tactics
Scope
Also: *Commitment: (at least perceived)
*Strategic Interaction
Participants: Who’s In?
It matters: Aspartame (Nutrasweet)
1965 Chemist making Lspartic acid licks his fingers
1970 Patented
1983 USDA approved for beverage use
1987 and 1992 – patent expiration date for US and EU.
1986 Holland Mining Co builds Aspartame Plant “all
manufacturer’s want at least two suppliers.”
1987 Aspartame price falls from $70/lb to $20/lb
1990 Coke and Pepsi sign supplier contract with
Monsanto (Nutrasweet manufacturer)
1992 Holland plant near nothing sales to US market.
Who Won?
You:
are a new sales rep at Pratt & Whitney,
selling engines to plane manufacturers.
You make standard 2% commission (one
737 engine costs about $4 million). You’re
hoping to sell two engines this year.
Boeing-your competitors’ main customer
calls you.
What are you going to do?
Your boss
is going to kill you. Why?
Two days…weeks….months later, Boeing
hasn’t returned any calls or spoken to you….
…because they “shopped” you.
Boeing went to their supplier with your bid.
They only went to you for a price.
Your other long term customers have
heard that Boeing got a sweetheart price.
Your competitors think you are trying to
price compete, so are going to retaliate.
Nice work hero!
Player Gaming Continued
Eight Hidden Costs of Bidding:
1. There may be better uses of your time.
2. When you win the business, you lose money. (price
sensitive customers)
3. Your competitor can retaliate.
4. Your existing customer will want a better deal.
5. New customers will use the low price as a benchmark.
6. Competitors will use the low price as a benchmark
7. It doesn’t help to give your customers’ competitors a better
cost position
8. Don’t destroy your competitors’ “glass houses”
Player Gaming Continued
Your presence in a competitive situation is
valuable: you don’t need to give it away
Ask for contributions up front
Ask for a guaranteed sales contract
Ask for better access to information
Ask to deal with someone who will appreciate
what you bring to the table
Ask to bid on other pieces of business in
addition to the current contract
Ask the customer to quote a price at which he
will give you his business
Added Value: What are you
bringing to the table?
This is where we usually screw up:
Underestimating our added value
Overestimating our added value
BATNA? Comes from this
Added value
Prize: University sets up a deal worth $2600
They will give us $100 for each red/black pair of cards
Rules:
1) Card holders bargain iteratively on individual basis.
(you don’t communicate with other card-holders)
2) One person holds 26 black cards.
3) 26 people hold one red card.
4) You negotiate to get the black card holder to give you
money for your red card.
5) If they don’t buy your card, they get nothing.
6) If you don’t sell your card, you get nothing.
Added Value-New game
What’s different?
Prize: University sets up a deal worth $2600
They will give us $100 for each red/black pair
of cards
Rules:
1)
2)
3)
4)
5)
Card holders bargain iteratively on individual basis.
One person holds 23 black cards (she threw away
three cards)
26 people hold one red card.
You negotiate to get the black card holder to give you
money for your red card.
If they don’t buy your card, they get nothing.
If you don’t sell your card, you get nothing.
Added Value – Under Supply
Oversupply: each customer has added value
Undersupply: each has no added value:
Examples of Monopolies/Intentional Undersuppliers
Opec
DeBeers
NFL
Rules
Find out what they are, change them to your advantage
if you can.
1. “Take it or leave it” offers
2. Last look provisions
1.
2.
3.
4.
+ Reduces incentive for competitors to bid
+ Takes the Guesswork out of bidding
+ Lets you decide whether customer is worth keeping
- Allows competitors to bid without having to deliver
1.
Tactics
st
Offer “1st Class” guarantees if you offer 1 class
service or products
1. + Communicates the excellence of your offerings
2. + Inferior competitors can not match your commitment
3. + Communicates to your organization the importance of
quality
2.
Complex Pricing Schemes:
1. + Hide high prices
2. + Disguise opportunistic pricing
3. + Hide low prices too  preserving an image of quality
4. + Hamper comparison shopping
5. - Increase administrative costs
6. - Confuse and frustrate customers