Publication number: ELQ-55791-1
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Game Theory Models Excel Template
A tool designed to anticipate competitors' strategic decisions.
Pricing models or demand forecasting aim to find the optimal solution to maximize benefits. However, this optimization rarely takes into account that competitors are not static actors and will probably react to strategic decisions.
Game theory models takes the actions of other players into account, and offers a theoretical equilibrium in which no player can be better off from playing their strategy. There are four main types:
1) Static games of complete information: where movements are simultaneous and all players know the payoff functions of their competitors
2) Dynamic games of complete information: where movements are sequential and all players know the payoff functions of their competitors
3) Static games of incomplete information: where movements are simultaneous and at least one player does not have complete information about the payoff of competition
4) Dynamic games of incomplete information: where movements are sequential and at least one player does not have complete information about the payoff of competition.
Another key element of game theory models is the repetition of games, as a result of players' strategy can change depending on the number of games. In this case, we can calculate the net present value (NPV) of future outcomes, as the nearest payoffs are more valuable than the distant. When applying these models there are some assumptions:
- Players are rational;
- Players are risk neutral;
- Each player acts according to his/her own interest;
- When making a decision, each player takes into consideration other players’ reactions.
This template aims at profit maximization based on decisions about price changes. Profits (or payoffs) are calculated by the difference between a cost function and a demand function.
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