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The relevance of game theory in its application to decision making in competitive business situations Ng, Kim Seah

Abstract

It is known that in situations where we have to make decisions, and in which the outcomes depend on opponents whose actions we have no control, current quantitative techniques employed are inadequate. These are depicted in the complex competitive environment of today's business world. The technique that proposes to overcome this problem is the methodology of game theory. Game theory is not a new invention but has been introduced to economists and mathematicians with the publication of von Neumann and Morgenstern's book "Theory of Games and Economic Behavior". Since then it has remained relatively obscured as a tool for aiding management decision making partly because it has become more mathematical in nature, and, as a result of the vast amounts of computation involved for any reasonable size problem. However, with the advent of the high speed electronic computer the possibility of practical application to large scale business problems is within sight. Efforts are therefore seen to undergo reorientation. The recent development of a competitive decision model at Shell Development Company in California is a step forward in this direction. This thesis examines various aspects of game theory that would appropriately lead to areas of fruitful practical applications. A series of examples were discussed to demonstrate the analytical process of game theory. The features of the model that the Shell research group set up were analyzed and discussed for possible applications to industrial situations. Our general conclusion is that, although the Shell model does indicate to us the sort of results that a game theoretic model could provide and to leave us with a clearer understanding of the problem, it has not answered the question of how we should proceed to use these results.

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