Article

Vaggelis Pantidos
Vaggelis Pantidos 4 February 2014

What are some of the ways Game Theory is used in marketing, advertising, and branding?

Game theory has obvious uses in competitive analysis and strategy. That being said, I think we've only begun to scratch the surface in how much and how deep game theory is used. Companies have to come up with a strategy where the worst case scenario for them is still acceptably profitable and best case scenario for their competitor is still less than positive.

game theory in advertising


Game theory has obvious uses in competitive analysis and strategy.  That being said, I think we’ve only begun to scratch the surface in how much and how deep game theory is used.

Companies have to come up with a strategy where the worst case scenario for them is still acceptably profitable and best case scenario for their competitor is still less than positive.

  1. Consider a market with two major players- A and B.
  2. Every action of A to market its product comes with the intention of harboring profits – be it increasing prices to drive profit per unit, or decreasing prices to drive sales volumes or introduction of a new product to capture the untapped market.
  3. Market being a closed one, A’s gain will mean B’s loss – B is bound to suffer because of any move that A takes to do better in the market. Hence, B responds with a counter campaign.

This is a classic Nash equilibrium situation where any action directed with a particular outcome in mind, drives reaction from competitors and hence gives less than expected (sometimes unexpected) results. Most of the times, B’s reaction to a particular marketing exercise are already anticipated by A’s market intelligence team, and of all the alternatives that are present, one that acceptably meets A’s objectives in the worst case scenario and pushes back B (in short term generally – in long term, market balances out) is accepted.

In marketing, one obvious use of game theory is in signalling.

Suppose there are two firms producing same kind of products but with different qualities. Game theory can help :

  1. in deciding whether the firm with good quality product should opt for a certification or standard or any other signal to the market.
  2. in answering whether the signal will help it gain better payoffs (after considering the cost).
  3. in understanding whether the low quality product firm can bluff or not by sending the same signal. If bluffing is not possible it makes sense for the firm to invest on certification and send the signal.

Another example is of business schools. Business schools send a signal and this helps in branding of the graduates. For this signal to work effectively, game theory can help in deciding the cost (time, money, effort) incurred to send the signal (earn a b school degree) so that only high performers can send the signal and bluffing is not possible by low performers.

 

Please login or register to add a comment.

Contribute Now!

Loving our articles? Do you have an insightful post that you want to shout about? Well, you've come to the right place! We are always looking for fresh Doughnuts to be a part of our community.

Popular Articles

See all
Digital Marketing Vs. Traditional Marketing: Which One Is Better?

Digital Marketing Vs. Traditional Marketing: Which One Is Better?

What's the difference between digital marketing and traditional marketing, and why does it matter? The answers may surprise you.

Julie Cave
Julie Cave 14 July 2016
Read more
The 8 Most Effective Words to Use in Your Next Email

The 8 Most Effective Words to Use in Your Next Email

There are 8 simple, yet effective words you can use to increase engagement in your next email. You can use these words strategically to inspire your subscribers to take action or develop good feelings about you and your brand. Read on to learn about these 8 words and how to use them in your emails.

Shelby McGuigan
Shelby McGuigan 8 August 2017
Read more
4 Important Digital Marketing Channels You Should Know About

4 Important Digital Marketing Channels You Should Know About

It goes without saying that a company can't do without digital marketing in today's world.

Digital Doughnut Contributor
Digital Doughnut Contributor 5 November 2014
Read more
What is a CMS?

What is a CMS?

You’ve heard the term CMS, but what is it, what does it actually do? A CMS empowers you to get your companies' message out there, internally, externally or both.

Sean Hargrave
Sean Hargrave 14 August 2017
Read more
The Importance of Customer Relationship Management Within a Business

The Importance of Customer Relationship Management Within a Business

In a world where competition is becoming ever fiercer, businesses need to implement customer relationship management, or CRM, strategies in order to stay ahead of their rivals.

Emma Newbury
Emma Newbury 18 April 2016
Read more