Game Theory Approach to Managerial Strategies and Value Creation Diverse and Global Perspectives on Value Creation Set coordinated by Nabyla Daidj Volume 3 Game Theory Approach to Managerial Strategies and Value Creation Abdelhakim Hammoudi Nabyla Daidj First published 2018 in Great Britain and the United States by ISTE Ltd and John Wiley & Sons, Inc. Apart from any fair dealing for the purposes of research or private study, or criticism or review, as permitted under the Copyright, Designs and Patents Act 1988, this publication may only be reproduced, stored or transmitted, in any form or by any means, with the prior permission in writing of the publishers, or in the case of reprographic reproduction in accordance with the terms and licenses issued by the CLA. Enquiries concerning reproduction outside these terms should be sent to the publishers at the undermentioned address: ISTE Ltd John Wiley & Sons, Inc. 27-37 St George’s Road 111 River Street London SW19 4EU Hoboken, NJ 07030 UK USA www.iste.co.uk www.wiley.com © ISTE Ltd 2018 The rights of Abdelhakim Hammoudi and Nabyla Daidj to be identified as the authors of this work have been asserted by them in accordance with the Copyright, Designs and Patents Act 1988. Library of Congress Control Number: 2017955864 British Library Cataloguing-in-Publication Data A CIP record for this book is available from the British Library ISBN 978-1-84821-973-1 Contents Introduction ................................... ix Chapter 1. Game Theory and Strategic Management ...... 1 1.1. Game theory and strategic management: semantic and/or conceptual convergences? ........................ 1 1.2. The current position of game theory in strategic management .................................. 7 1.2.1. Game theory and the school of positioning .......... 7 1.2.2. Growing interest for game theory ................ 13 1.3. The theoretical determinants of coopetition: borrowed from game theory .............................. 16 1.3.1. The origin of coopetition ..................... 16 1.3.2. Coopetitive practices ....................... 18 1.3.3. Mechanisms of value creation in the value network (value net) ................................. 21 1.4. Conclusion ................................ 25 Chapter 2. From Static Games to Dynamic Approaches .... 27 2.1. Introduction ............................... 27 2.2. Strategies and solution concepts: static games ........... 28 2.2.1. Decentralized concepts ...................... 28 2.2.2. Maximin and Minimax solutions or the search for a new level of security .......................... 41 2.3. Process of dynamic decisions: solutions concepts ......... 44 2.3.1. “Non-cooperative collusion” or “tacit collusion” ...... 45 vi Game Theory Approach to Managerial Strategies and Value Creation 2.3.2. Sequential games ......................... 56 2.4. Conclusion ............................... 69 Chapter 3. Coalitions Formation .................... 71 3.1. Introduction ............................... 71 3.2. The notion of a coalition and the cooperative approach ..... 73 3.3. Emergence of cooperation: from collective rationality to individual rationality .......................... 84 3.3.1. Some illustrations ......................... 84 3.3.2. Emergence of cooperation .................... 86 3.4. A simple conceptual frame of analysis for cooperation: notions of internal and external stability of a coalition ........ 90 3.4.1. The concept of stability as a basic property of cooperation ................................ 92 3.4.2. The stability as an equilibrium property of a game ..... 93 3.4.3. Examples .............................. 96 3.4.4. The role of heterogeneities ................... 99 3.4.5. R&D in a context of asymmetrical firms ........... 103 3.5. Conclusion ............................... 105 Chapter 4. Application 1: Dieselgate ................. 107 4.1. Introduction ............................... 107 4.2. Storytelling: for those who missed the beginning ........ 108 4.3. Presentation of the facts and strategic reading .......... 110 4.4. The strategic variables and the associated game ......... 115 4.4.1. The rules of the game ...................... 116 4.4.2. Payoff ................................ 121 4.5. Game resolution and strategic analysis ............... 123 4.5.1. Perfect equilibrium of the game where fraud is deterred . 125 4.5.2. Perfect equilibrium with the firm committing fraud ..... 128 4.6. Conclusion ............................... 134 Chapter 5. Application 2: Emergence of Food Safety Standards ............................... 137 5.1. Introduction ............................... 137 5.2. The game ................................ 140 5.3. Nash equilibrium ............................ 145 5.4. Conclusion ............................... 154 Contents vii Chapter 6. Application 3: Petrol Stations .............. 157 6.1. Introduction: price structure of a multi-store firm and fragilization of isolated competitors ................. 157 6.2. The facts ................................. 157 6.3. Strategic management questions ................... 161 6.4. The game ................................. 163 6.5. Price structure in the event of collusion ............... 165 6.6. Price war threat and game equilibrium ............... 171 6.7 Game equilibrium within a time horizon .............. 173 6.8. Conclusion ................................ 177 Chapter 7. Application 4: HD-DVD versus Blu-ray ........ 181 7.1. Introduction: individual strategies and collective dynamics ... 181 7.2. Constitution of HD-DVD and Blu-ray consortiums ........ 182 7.3. Definition of the game ......................... 186 7.4. Numerical application ......................... 191 7.5. Conclusion ................................ 195 Conclusion ................................... 199 Appendices ................................... 203 Appendix 1 ................................... 205 Appendix 2 ................................... 231 Bibliography .................................. 239 Index ........................................ 259 Introduction This title is the prolongation of an idea initiated in our 2007 book on the bonds between game theory and strategic management theories [DAI 07]. Thus, the objective was to show how game theory could be useful for a firm engaged in formulating its strategy. The idea was to demonstrate through representative case studies of current issues in strategic management that game theory could be used to: – provide an original analysis grid for the outcomes of a certain number of situations whose concrete results could be useful for managers (ex post analysis grids); – provide managers with pointers in terms of strategic decision- making, allowing them to structure their line of thought around alternative – or at the very least, complementary – logics to the ones that emerge from their day-to-day work. This first book caused reactions both in the academic world, during conferences, and in the “professional” world, during conventions or during the creation of case studies that began using this procedure. The concepts and tools developed within this first title were inspired by lessons from various courses with students of master’s programs and various professional and academic profiles. The common x Game Theory Approach to Managerial Strategies and Value Creation denominator for this audience is generally the desire to acquire tools that stay relevant to the reality they are attempting to study. A technical presentation of game theory tools to this audience would be counter-productive. It is therefore preferable to work toward making these tools accessible. Managerial techniques need to be supported by real-world applications, but decisions must also be restructured around new methods of analysis. Game theory responds to the required intellectualization of real-world analysis provided that the primary lessons fit in with the reflexive tradition of strategic management theory. Both the first and current study respect that philosophy through the association of two authors whose experiences and careers are different yet complementary. The first among them is an industrial economist, specialized in applied game theory (to various industries including agri-food), who, for a long time, focused on useable formulations of concepts of game theory for operational use. The second author is a strategic management specialist experienced in the analysis of themes from various sectors. Her expertise connects the more classic methods of her field with an openness to original methods of game theory. This sort of pedagogical procedure, appearing in the first book, was presented and “tested” among different audiences and feedback has been positive overall. These different elements encouraged us to develop this approach, especially considering that, since 2007, there has been an increasing interest in game theory explained by the changing and uncertain context and climate which businesses are developing in. This increased interest, beyond being a temporary trend, demonstrates the necessity of research tools capable of structuring this philosophy in contexts of interaction so complex that traditional tools prove to be insufficient. A number of blogs, consultancy firms such as Capgemini (Box I.1) as well as various companies such as Orange (Box I.2), openly refer to game theory as a potential tool to help decision-making at a managerial level. Introduction xi “How can a sourcing manager take tips from these games and use them to their advantage? By studying the bid