Game Theory In International Business Strategy example essay topic

Summary In the statement, it is considered that game theory is hard to use in developing and implementing international business strategy. In the following parts, by analyzing the standpoint of the statement and the definition of game theory, I would critically assess the statement. In the following parts, some general examples would be provided to discuss whether or not game theory is suitable for international business strategy and why the statement is considering that in international business game theory is hard to be developed. In addition, the effects of globalization on game theory in international business strategy will be considered as an additive factor. Finally a conclusion would be made that although game theory cannot be used in international business strategy as simply as it is used in domestic firm strategy, it can be expected that game theory can be well used in regions and blocs development in the future.

Analysis on the statement Firstly why the statement indicates that game theory is too hard to use in international business strategy thinking should be discussed, and before this, the definition of game theory can explain some questions. Game theory can be defined that under some situations and rules, depending on the information they hold, individuals take their own strategies and acts at the same time or in some sequence, to get their own goals (Norton, 1995, P 36). Here some key words related to the statement can be discussed. Rules: although players in the game would make a rule as soon as they reach equilibrium, previously they must have a rule to start the game. In the general business strategy, because firms are under the same policies and laws, the final equilibrium is easy to reach. But, when the business is taking place between different blocs or different regions, not only economic factor but also policy or other factors always affect the final equilibrium (Beasley & Case, 2003, P 7).

For example, American is the most powerful country in the world, and it can set up tariff wall to protect its domestic firms. If a developing country set up a same tariff wall in the game, although the game can reach equilibrium, the developing country would be hurt more in the game. In addition, American can also use other strategies to inflict press on the developing country. So, it is can be said that game rules in international business are more complicated. Information: the flow of information affects the structure of the game. In a general game, it is easier for players to get perfect and complete information, and when they choose a strategy there is less uncertainty.

However, in international games, it is harder for players to get perfect and complete information because they have to face a much larger market. Moreover, in international business, players must consider some information for example, exchange rate, which they cannot meet in other games. Such information affects all the players in international business, and affects the final equilibrium of the game. Although the more complicated information is not relative to the result that the game can reach equilibrium, it is can be imagined that different players have different ability to deal with the same information. If the information was more complicated, the final equilibrium would be moved (Mulford, 2000, P 388). Sequence: the order in which players take their strategies and choose their acts depends on the players! ability to deal with the information.

Mostly the powerful player in the game would choose strategy and act at first and in other time all the players choose strategies and act at the same time. However, sometimes the player who is less powerful must take previous act because of the press from others. This situation would be explained by example in the following parts. It is can be said that the orders in which players act is not only a process to equilibrium; it is also can be imagined as a part of strategy. In addition, in international business, orders are more important in games. Goals: in most texts authors work in!

^0 payoff! +/- instead of! ^0 goal! +/-, because they are different. Payoff means the level of reward that players receive from a given outcome, while goal means the level of reward that players expect to receive from a given outcome (Grabowski, 1994, P 3). Under the theory of noncooperation game, most of time! ^0 goal! +/- is much higher than! ^0 payoff!

+/-. Here goal is thought as a key word because a game between regions or blocs is always noncooperation game, and that is the reason why the statement thinks it is hard to use game theory in international business strategy. As the analysis and definition above, the reason why the statement considers that game theory hardly can be used in international business strategy can be concluded as below: In a general game, players have similar status (that means although they have different power, they have similar right and can choose strategy without considering other factors besides economic factor), but because of such factors as government policy, in international business the strategies of players are always affected by other players! power (not only others! strategies). It is can be said that players are working under different rules. Secondly, larger market leads to more complicated information. Since that, managers in international business must consider more to choose their own strategy.

In addition, more complicated information always leads to that managers cannot get perfect or completed information, so the equilibrium would be moved. At last, because of the effects of rules and information, the sequence in international game sometimes is different from the order in general games, and it makes managers choose different strategies to suit international situation. From the analysis above, it can be seen that the statement which considers game theory is hard to use in international business strategy has its own reason. However, the following parts will discuss the several main factors respectively with examples to solve the questions in the statement.

Game theory in international business The first question is associated with the government policy in international business strategy. As the analysis above, when governments play as roles in international trade or competition, the situation and the factors! strategies will be moved. Here is an example about industrial subsidy: In this example, Boeing (American) and Airbus (European) are competing in a world market. They can choose to produce (P) or not (N). If they both produce, competition will drive down the price and they will both lose. If neither produces, neither gains.

If one produces and the other doesn't, the producing company takes the entire market share and the other company gets nothing. This is similar to the previous example, and two Nash equilibrium (P, N) and (N, P) have been found. If it is assumed that Boeing has chosen P already, by the same process of backward induction as before, it is found that Boeing chooses P and Airbus chooses N. In other words, it is not in Airbus's interests to enter the market. Now suppose that the European government regards the aircraft industry as very important. To encourage Airbus to enter the market, the European government might subsidize production. This changes some payoffs, and changes the game's structure: If Boeing chooses P, Airbus will choose P. If Boeing chooses N, Airbus will still choose P. Now Airbus has a dominant strategy P. Then, theoretically, Boeing calculates its payoff again and finds that N is its best strategy.

Although this looks attractive for Airbus, there are other factors to consider: If Airbus is subsidized by the European government, the U.S. government can retaliate by subsidizing Boeing. Then Boeing will keep producing (strategy P), which will incur losses to both producers. Both producers are then subsidized by their governments, and all the burden from the subsidy is borne by taxpayers. If Boeing is stable in the U.S. domestic market, it might be able to absorb the competition from Airbus.

In other words, its P payoff might be greater than anticipated by Airbus. If Boeing's payoff from P is positive, it will keep producing. Here we can see the truth. In 1990's, Airbus wanted to cooperate with Boeing to develop a new type plane (A 3 xx), however, Boeing refused this suggestion because the managers thought there would be large market risk and the new plane would need large investment (The economist, 1993, P 74).

After 10 years, depending on the new type plane, for the first time Airbus exceed Boeing!'s market share. Boeing thinks the government of EU has subsidize the Airbus to develop the new plane because the price of the new plane cannot suit for its cost, but Airbus insist that all the fund from the government is term inability loan, and these loans accord with the agreement between EU and the U. S government in 1992 (The economist, 2003, P 65. ). From the example it is can be seen that when government participate in international business, the players! strategy also can be analyzed in game theory, although the final equilibrium will be changed.

The intervention of the government has change the status of the player in the game, in another word, it change the player who has dominant strategy. In a game, normally one player has dominant strategy, the other player also has its right to choose its strategy, although it may be less powerful than its opponent, and it also suit for games in international business. Another example shows that in complicated international competition, how the player who is less powerful use game theory to gain its payoff. The depression of American stock market shows the end of new economic boom term, and the economic depression of America aggravates the trend of global deflation. After it tries a lot of measures to deal with the economic problems, finally America abandons its! ^0 Strong US.

Dollar! +/- policy, which it has kept for many years, and it tries to decrease the exchange rate of dollar to develop export. However, in the global market America has several main competitors, such as EU, Japan and China. Because China has kept a large favorable balance in international trade for a long term, and the Chinese government has taken a! ^0 banding exchange rate! +/- (fixed exchange rate) to US Dollar as mother currency policy for nine years, American government try to find a entrance from Chinese Currency policy. On the other side, the Chinese government has it own problem that the current currency system is not completed, if Chinese Yuan increased its exchange rate, the national economic would also face to pressure. For Chinese government, this is a game, but a complicated game (Deal, 2003, P 110.) Consider the game between China and America, one who can choose its strategy between keeping exchange rate (K) or increasing exchange rate (I), while the other one has already chosen its strategy.

If China choose (K) as strategy, it can keep and expand the favorable balance, and get more payoff than its opponent; If China choose (I) as strategy, the favorable balance will be decreased, but China also can gain more payoff than its opponent; It seems that whether or not China chooses to reduce the Chinese Yuan exchange rate, it always can gain more payoff than its opponent. But does it really have dominant strategy? It is not a truth. Firstly this given game is based on two-player trade between America and China. But if China changes its exchange rate, it must affect the export and import between China and other countries, and it will lose the payoff from the business with other countries. On the other side, if China do not change its exchange rate, it have to deal with another problem that it cannot provide evidence if it face to condemnation of acting against the rules of International Monetary Fund (I.M. F) (Mal pass, 1997, PA).

In addition, in the future China will lose its dominant status in international business, because increasing Chinese Yuan!'s exchange rate is not only American wish, bust also Japanese and EU!'s wish. As the analysis above, hardly China can make a pretty strategy, but it is clearly that for its lone term developing, it must make a change in its policy. To keep the payoff in international trade, if China chooses to increase its exchange rate, it can make a middle strategy that it can increase Chinese Yuan!'s exchange rate but do not choose a floating exchange rate. It can be described as such equilibrium: currently America gets what it wants and reduces its economic pressure from the unfavorable balance, and it can get payoff but not zero from the game; on the other side, China reduces its payoff in the current game but keep a expect in the future games.

In the game China chooses a passive status because America has already chosen its strategy, in another word, America has the dominant strategy and there is no dominant strategy for China, but the result can be regarded as a cooperate game result. From this example we can see that in complicated international business, for players they can also use game theory to analyze the strategy, although there is power difference the players. Globalization is an important factor when game theory is talked in international business strategy. Since unions as EU, cooperation as NAFTA appeared, international business has changed a lot.

At the part of strategy, when a country wants to make an agreement with a member in one union / cooperation, it must consider the effects of agreement on other country in the union / cooperation ; on the other side, when a member in the union / cooperation wants to make an agreement with one country out of the union / cooperation, it must consider the agreement in the union / cooperation, and other countries benefits in the union / cooperation. In addition, agreement in union / cooperation or the union / cooperation itself is also a game (Ward, 1993, P 203). Here is an example: There are two countries in the market, and they can choose to operate independently (strategy I) or form a union (strategy U). The payoffs are as follows: If they form a union, they agree to abolish the tariff wall, so they both gain 8.

If they both set tariff wall, they both gain 4. If one set tariff wall but the other not, firms in the country which set tariff wall will gain more, and the other countries! firms will gain less. In fact, the third supposition is impossible, and no one will abolish tariff wall when its opponent set up tariff wall. So, normally there are only two feasibilities, double wall or no wall. Easily it can be seen that only when both of the two countries abolish the tariff wall, they can earn the maximum payoff. Although tariff wall can protect the domestic industry, in a long term, both of the country will lose a lot of payoff.

On the other side, when a country out of a union wants to make an agreement with a member, it is can be discussed as: If they form a cartel, they agree to limit production, hence increasing price, so they both gain 8. If they both operate independently, they both gain 4. If they agree to form a cartel, thus increasing the price, but one betrays the other by producing more than agreed, and then that one gains a lot while the other loses a lot. It can be considered that if country which loses a lot is the member in the union, the other member in the union must take retaliated action.

So the appearance of union can protect the method of international business system. As the discussion above, according to the game theory, globalization is the best way to improve the international system. Conclusion In the essay, firstly the view of the statement is discussed in several keywords, to find the reason why the statement thinks game theory is hard to use in international business strategy. In the analysis it can be seen that the rules in the game of international business is one of the most important factors which make game theory as a special thinking in international business. Then in the following parts, using two examples, including the case of airplane producing and foreign exchange rate, I discuss the function of government and the strategy under the government control.

Finally it has been discussed that how globalization work in game theory using in international business and how game theory promotes globalization. In conclusion, as a tool in a wide range, game theory also can be used in international business strategy, not only explaining some current situation in the world, but also anticipating the global business system. (2722 words).