Business

Trapped by a prisoners dilemma

I am lucky to live in the beautiful city of Bath in the south-west of England. Bath is renowned for its Roman Baths and Georgian architecture but its council has fallen into a prisoners dilemma. The city has three main … Continue reading

Game theory of takeovers

If you are a shareholder in a company that is the subject of a takeover bid then would you want the raider trying to acquire your company to promise to take millions out of the company once they gained control? The natural … Continue reading

Changing the game by playing it

I don’t want to belong to any club that will accept me as a member! Groucho Marx famously said that he would not want to be a member of any club that would want him as a member. This is … Continue reading

Fail fast

Marks & Spencer is the latest company to follow the likes of Google and Apple by taking up the idea of failing fast. They are looking at introducing new technologies, including augmented reality, into their latest campaign. This works for … Continue reading

Facebook shares fall again

Facebook shares fell further today to only just over half their initial price of $38. There are plenty of reasons for the fall, the drop today being due to the end of the lock-in period for early investors. What is … Continue reading

Why land prices fell 97% in two years

Chesapeake Energy Corp and its Canadian rival Encana are being investigated following claims that they colluded to avoid bidding against each other for land in Michigan. In May 2010 Michigan State made $178 million from an auction of oil and … Continue reading

Is OPEC about to break-up?

OPEC is an organisation made up of 12 oil-producing countries which operates as a cartel to try to control oil prices. It was formed in 1960 by Iran, Iraq, Kuwait, Venezuela and Saudi Arabia, with most of the rest of … Continue reading

Spain’s euro bailout

Spain is to receive a 100 billion euro bailout to save its failed banks. Not only that but it will get a better deal than Ireland got when it was bailed out. Should the Irish government have negotiated a clause … Continue reading

The winner’s curse

Iraq has been auctioning off rights to some of its oil and gas blocks in the last couple of days. Often these big auctions lead to a situation called ‘the winner’s curse’. The winner’s curse is when the winner of … Continue reading

Why your competitor’s loyalty scheme is good for you

Many companies operate loyalty schemes for their customers. These might be frequent flier programmes for airlines, or loyalty cards for retailers. These bring an obvious benefit to the company running the program, they retain more loyal customers. When the first … Continue reading

When emotions trump math

In Blackjack a player is dealt two cards face up and the dealer is dealt two cards, one face up and one face down. If the dealer’s card is an ace then the player can take insurance against the dealer … Continue reading

Facebook & Instagram – what Mark Zuckerberg might have said

    Facebook have announced their purchase of Instagram for a cool $1bn. Why pay so much money for a company which is less than two years old, only has 13 staff and almost no revenue?     Network effects … Continue reading

Why is a brewer buying an airline?

San Miguel is famous for its beer and is the Philippines major brewer. As well as beer it is a major food and packaging company and has recently been diversifying its interests. It has now announced that it is going … Continue reading

The hidden benefit in using small companies

Last year Lloyds TSB started a programme of staff cuts, cost cutting and efficiency improvements. They said: “We will optimise our demand management, simplify specifications and further strengthen our supplier relationships, reducing the number of suppliers to the group from … Continue reading

Be careful before you put your competitors out of business

Too many people think of business as a simple win/lose situation, where for every winner there must be a loser. Gore Vidal summed up this idea when he said: “It is not enough to succeed. Others must fail” Alan Mulally, … Continue reading

Keep your friends close and your enemies closer

If you want to buy a diamond in London then where would you go? This map shows the top diamond shops in London, they are in two clusters, Hatton Garden and Old Bond Street. Similarly, New York has its 47th … Continue reading

When money becomes worthless

  This picture is of a billion Mark note from Germany in the early 1920s. In 1923 it wouldn’t even buy you a loaf of bread.     Printing Money Rudolf Havenstein was the president of the Reichsbank, the German national … Continue reading

What you can learn from the world’s most successful coupon campaign

                  Back in 2004, Wednesday was the least popular day to go to the cinema in the UK. A single campaign has transformed Wednesdays into the most popular weekday to visit the … Continue reading

What you can learn from Princeton’s most expensive lawsuit

When George Hartford started working as a clerk for a small New York tea wholesaler in 1861 he could not have known that 100 years later his grand-daughter would give $35m to Princeton, and that this endowment would go on … Continue reading

A strategy lesson from the ugliest woman in history

Margaret, the Duchess of Tyrol was born in Austria in 1318, her father was the Duke of Carinthia and Count of Tyrol. She was possibly one of the ugliest women who ever lived and yet still lived a life full … Continue reading

Starbucks marketing escapes the prisoner’s dilemma

“In the first 30 years of our company, we spent more money on training than marketing”   These are the words of Howard Schultz, Starbucks chief executive. Starbucks has grown from a few hundred stores in the early 1980s to … Continue reading

Is Pete Townshend right to call Apple a vampire?

Pete Townshend from The Who said today that Apple is bleeding artists like a digital vampire. He also said that digital file-sharing is ‘destroying copyright as we know it’. Pete thinks that Apple should be doing more to support the … Continue reading

Do central banks cause attacks on their currency?

My last post looked at the game theory of exchange rate attacks. They are a co-ordination game where if enough traders believe that an attack will be successful then it probably will be. This leads to the question of whether … Continue reading

How exchange rate attacks work

Exchange rate attacks, when traders attack a currency with a fixed exchange rate, are an interesting game theory example. Countries used fixed exchange rates to give stability and encourage trade with the larger country who’s currency they have fixed their … Continue reading

Mathematics of a price war

In my last post I looked at two companies competing over a natural monopoly. We saw that once they started competing it would not then make sense for either company to drop out. This is why price wars tend to … Continue reading

Why you won’t win a price war

Today I will look at a simplified situation where two companies are battling over a natural monopoly. Whilst they are both competing the market isn’t big enough for either of them to make a profit. Once one of them drops … Continue reading

David Cameron, credit cards and game theory

The first version of David Cameron’s speech to the Conservative party conference contained a call to households to pay off their credit card debts. What’s the game theory of paying off your personal debts? We might represent the situation through … Continue reading

What you can learn from the European bank tax

Jose Manuel Barroso, president of the European Commission, has today announced proposals for a financial transaction tax on banks across Europe. The UK Treasury immediately said that it would absolutely resist any tax that was not introduced globally. The impact … Continue reading

Successful pricing strategy

If you found $10 on the floor would you give any of the money to your neighbor? If your neighbor had found $10 and you had the chance to take some away from him, would you? It is effectively the … Continue reading

Evolution and company size

Some people believe that bigger is better when it comes to business (and other things!). We only have to look at nature to see that successful strategies don’t always involve being bigger. Success comes from being the right size and … Continue reading

Clear chain of punishment

Imagine that you have five different suppliers. You know that their costs have recently fallen and you want them to pass the savings on to you by reducing their price by 10%. Each supplier knows that you cannot afford to … Continue reading

Four easy steps to get a pay rise

You: ‘I’m going to quit if you don’t give me a 20% rise’ Boss: ‘I don’t believe you’ll really quit, sorry, no pay rise’ Now you have to quit your job or back down – either way you don’t get … Continue reading

The easy way to stabilise petrol prices

Don’t you hate it that petrol prices go up when oil prices go up but they don’t come down when oil prices come down again? Oil down 18%, petrol up 2% Since April 8, the price of Brent crude has … Continue reading

My enemy’s enemy is my friend

My enemy’s enemy is my friend – a strategy often used in politics and business – but is it a good strategy? Let’s take the example of Iran in the late 70s. The Iranian Hostage Crisis The Iran hostage crisis … Continue reading

What’s wrong with meetings, and how to fix them

Al Pittampalli has just published a book, Read This Before Our Next Meeting, about how to make meetings better. What’s wrong with meetings In this post he compares meetings to a tragedy of the commons. The idea is that time … Continue reading

Why long-term bonuses for bankers won’t work

After the banking crisis much has been made of linking bankers’ bonuses to long-term performance. This is an attempt to overcome the short-termism that, in part, led to the crisis. It won’t work. Let’s look at this in terms of a game … Continue reading

When would you turn down free money?

People will turn down free money if they think the deal is unfair. The ultimatum game is a simple game which shows this. The first player is given £100. They then choose to give a proportion of that money to … Continue reading

How technology changes the rules of the game

Indiana Jones gives us a fun example of game theory. In the Raiders of the Lost Ark there is a scene where Indy is faced with a highly skilled opponent wielding a huge sword. If he fights on the same … Continue reading

Game theory of charitable giving

Charitable giving is difficult for traditional game theory to explain. Game theory assumes that everyone behaves rationally, so why would someone give money away to charity and get nothing back in return? But are they really getting nothing back? Surely … Continue reading

Buyback contracts

Last week a post looked at supply chains and showed that supply chains are usually inefficient and that leads to fewer units being sold. One way to improve the situation is through revenue sharing contracts (for example Apple), another is … Continue reading

How to raise more money for your charity

If charities have already raised some money for a project before the public phase of fundraising begins then research (by List and Lucking-Reiley) has shown that they will generate much higher contributions. In the research the target was to raise … Continue reading

How Apple makes their supply chain more efficient

Apple’s developer contracts help to overcome supply chain inefficiencies and give Apple higher profits. Supply chains are inefficient if the wholesaler and retailer both try to maximize their profits independently, this was examined in yesterday’s post. Today will look at … Continue reading

Supply chain inefficiency

If your company is part of a supply chain then you are probably not maximizing your profits. This post looks at why and in future posts I will look at what can be done to increase profits. Supply chains can … Continue reading

Jump in coal price shocks Indian power companies

Private power companies in India are going to be hit by increases in the price of coal that they import from Indonesia. They thought they had a strategy to deal with this but they have got it wrong. The price … Continue reading

Oil prices and OPEC (part 2)

The International Energy Agency (IEA) has said that its members are going to sell some of their oil reserves to bring down the oil price. The idea is that this will help the global economy and stop it falling back … Continue reading

Why half your inbox is spam

You have a good spam filter installed, it is advertised as removing 95% of all spam, and yet your inbox is still full of the stuff. The software company must be lying when they say that it is 95% accurate, … Continue reading

Why company car drivers have more accidents

Your insurance company has been increasing the amount of any claim that you have to pay yourself before they pay out. This amount is known as the excess. They are doing this because most people just look at the headline … Continue reading

Oil prices and OPEC

OPEC will meet today (8th June) to decide levels of production. The FT says this: ‘A large increase in production could damp current high prices, while a decision to maintain production levels would set the scene for a large drawdown … Continue reading

Beware of substitutes

If you can charge more for a product and still sell the same amount then you would want to, wouldn’t you? Be careful, it may not be the best thing long term. Take the oil market. Saudi Arabia’s official position … Continue reading

Why brokers might lie to you

CNN Money has just published a story about the ‘summer rally’ in stock markets. They say that in fact there hasn’t been any evidence for a summer rally for the last 40 years. There is an increase in stock markets … Continue reading

Tragedy of the commons

The ‘Tragedy of the Commons’ refers to a situation where a shared resource is overused by the people using it, even though they know that if they all overuse it then it will run out. Take an example of overfishing. … Continue reading

Why Brits don’t save for their pensions but Malaysians do

Only 39% of people in the UK are saving for their retirement, this compares to 84% in Malaysia. Why do so few people in the UK save for their future? Imagine a wealthy, powerful individual – let’s call him David … Continue reading

Iranian sanctions extended to Venezuela, but will they work?

The USA has imposed sanctions on Venezuela’s state oil company in retaliation for them trading with Iran (CNN story). These sanctions are unlikely to have any effect: research has shown that generally sanctions don’t work, why is this? If anything … Continue reading

Shell and first mover advantage

Royal Dutch Shell have announced that they are going to build a floating liquefied natural gas facility. This will be the largest floating structure ever built, six times the size of a big aircraft carrier and costing up to $15 … Continue reading

LinkedIn, bubbles and game theory

LinkedIn shares have rocketed up since they started trading and are now at around $100 per share. This values the company at about $10bn or 25 times revenue, this compares to Google which is valued at six times revenue. Clearly … Continue reading

Why accountants don’t compete

Apparently the Office of Fair Trading in the UK think there is a lack of competition in the audit market (link here). Is this really any surprise? Let’s have a think about the market to see why this might be … Continue reading

Perceptions matter, not facts

Toyota car owners are going to be able to pursue claims that the value of their cars has fallen because Toyota didn’t disclose or fix defects that made their cars accelerate suddenly (full story here). Toyota has said that there … Continue reading

Apprentice Game Theory

Here in the UK the latest season of The Apprentice started last night. It’s a classic game theory based TV show with contestants needing to co-operate and compete as they try to be the successful in attracting £250,000 of investment … Continue reading

Create natural monopolies to avoid competition

The UK Competition Commission has just said that the bus market in the UK ‘needs more competition’. But is it actually a surprise that there is not much competition for individual bus routes? A single bus route away from the … Continue reading

Chinese smarter than Americans?

In my previous post about Kraft’s pricing strategy I showed why Kraft signalling a price increase is a smart move. By signalling an increase they send a message to their competitors that they can increase their prices too and they … Continue reading

Kraft’s pricing strategy

Pricing can be a classic prisoners’ dilemma problem. All the companies in a market know that they will make more money if they increase their prices. But if everyone else raises their prices then a single company will be better … Continue reading