Using Evolutionary Game Theory to Deter Competitor Market Entry

Companies that innovate lead the market but often attract market chasers that seek to gain financial benefits of producing similar products. For organizations that have invented new products and services this can be an annoying aspect of doing business if high profits must now be shared with other market entry companies. To avoid easy access by competitors a company may desire to use a deterrence or shakeout strategy.

A study in the Journal of Academy of Marketing Science discusses how evolutionary game theory is used to understand whether a deterrence strategy and a shakeout strategy are more successful in keeping new businesses of out the market (Homburg, et. al, 2013). The method a company uses will determine whether or not they will be effective in ensure the costs are too high for other firms to pursue.

A deterrence strategy seeks to block potential competitors from entering the market. Strategies may include limit pricing, raising switching costs, new innovations, blocking access to suppliers and sales channels. Through this method the organization seeks to lock up the potential cost effective methods of conducting even before the new company moves into the market.

Shakeout strategy seeks to squeeze out competitors once they have entered the market. This strategy use predatory pricing, luring customers with deals, comparative advertising, soaking up market share and other methods that leave the market unprofitable for the competitor. When this occurs over time the competitor may opt to move out of the market and adjust their investment strategies. 

The shakeout strategy appeared to be more cost effective by helping to ensure that company expenses once entering the market are high and their profit margins lower. This effectiveness is based on the optimal costing strategy of comparative effectiveness of the two strategies. The use of deterrence is still a solid strategy but only under circumstances where maneuvers can create cost effectiveness. 

Homburg, C. et. al. (2013). Incumbents’ defense strategies: a comparison of deterrence and shakeout strategy based on evolutionary game theory. Journal of the Academy of Marketing Science, 41 (2).

Game Theory Shows Selfish People Eventually Lose-MSU Study

Christoph Adami, a professor of microbiology and molecular genetics at Michigan State University shows through his study that if you are selfish evolution will punish you. Teaming with Professor Arend Hintze they used hundreds of thousands of game theory simulations in biology, economics, political science and other disciplines to determine their results. They found that those who played the selfish zero-determinant game eventually lost. 

Selfish people who were playing against a single cooperative opponent won but lost against multiple players. They took advantage against those who they could recognize and determine their strategies. However, when they played in a larger field and did not know whom they were dealing with and the various types of cooperative and zero-determinant players they were playing against they eventually were beaten into a more cooperative stance. 

Let us assume for a moment you are dealing with an inherently selfish person and they have a history of similar activities. Perhaps you would understand their strategies and be selfish yourself so that no player actually has a benefit (equity) or you might adjust your strategies to gain an advantage. In the short term, being selfish may have some level of benefit over cooperative players but eventually the strategy will backfire as that person comes against new players with whom they do not know their history or their strategies. 

From an evolutionary stance, the researchers found that selfishness is against one’s own biology and the biology of a species. The species would eventually become extinct if all creatures were selfish and used the most self-seeking strategies. The game theory simulations found that in the end, the selfish players eventually always lost and would become extinct over time. 

This is great news for people who wonder why selfish people seem to get away with so much. Such people are taking advantage of others but in the end fail in their long-term strategies. Their strategies work when dealing with individuals whom they know and understand but fail over time. When they do not know the other players strategies or misunderstand the other person their advantages minimize. Selfishness becomes counterproductive.

 Let us reverse the situation and put a consistently cooperative person in the game. This cooperative person would lose in the short-run against selfish people but would eventually win over time as trust and cooperation bring mutual benefits. Society could not exist with all players being selfish and would not collectively adapt to challenges.  It would disintegrate into chaos and mutual destruction.

Generally, in game theory the cooperative players will devise new strategies so that selfish players do not have a large advantage. We do this naturally in life as we deal and learn from each other. Whether one is talking about criminal networks, dating, or simply business…equity will eventually result. Perhaps in the wider spectrum of things cooperative players will work together to completely oust uncooperative players. 

Let us view this in terms of a society. At two ends of the extreme, you have all cooperative players and another society has all selfish zero-determinate players. The cooperative society can hedge their skills and abilities for mutual survival. The society with zero-determinant players is a chaotic network that cannot work together, cannot adapt, and will eventually decline.  Has history yet taught us that societies with high levels of corruption, self-seeking behavior, and a basic disrespect for law and cooperation eventually decline or collapse?

Adami, C. & Hintze, A. (2013). Evolutional instabilityof zero-determinant strategies demonstrates that winning is not everything.Nature Communications, 4 (2193).

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