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Game theory in practice

"The use of modelling makes business clients more inclined to adopt longer-term strategies.”


The Economist3 September 2011


PA’s Dr Stephen Black, is quoted in an article in The Economist Technology Quarterly. Stephen gives his view on computer software that models human behaviour and can make forecasts, outfox rivals and transform negotiations.

The model uses a branch of mathematics called game theory, which is often used by economists, to work out how events will unfold as people and organisations act in what they perceive to be their best interests. Modelling behaviour using this game theory is proving especially useful when applied to economics.

Stephen explains to The Economist that “[PA] designs bespoke models to help its clients solve specific problems in areas as diverse as pharmaceuticals, fossil-fuel energy and the production of television shows. British government agencies have asked PA Consulting to build models to test regulatory schemes and zoning rules. To give a simple example: if two shrewd, competing ice-cream sellers share a long beach, they will set up stalls back-to-back in the middle and stay put.”

Stephen goes on to explain that “unfortunately for potential customers at the far ends of the beach, each seller prevents the other from relocating—no other spot would be closer to more people. Introduce a third seller, however, and the stifling equilibrium is broken as a series of market-energising relocations and pricing changes kick in. The use of modelling makes business clients more inclined to adopt longer-term strategies.”

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