Co-Opetition - Adam M. Brandenburger [32]
Epson then discovered that it was losing dot-matrix sales to the now comparably priced ink-jet machines. Prices had to come down in the dot-matrix segment, but there wasn’t much room to go. Epson’s core business was doubly squeezed.
What was Epson’s mistake? It misunderstood the scope of the printer game. By treating the laser printer game as separate from the dot-matrix printer game, Epson failed to see that low-price entry into the laser segment could jeopardize its core business. Perhaps Epson assumed that high-end laser machines could never cannibalize sales of low-end dot-matrix printers. If so, it failed to think through the links from laser to ink-jet segment and from ink-jet to dot-matrix segment.
The Epson story shows how a move in one game can affect your fortunes in other games. The links between games can cause a cascade effect, and Epson didn’t foresee the chain reaction it set off. Taken in the small, Epson’s actions seemed reasonable, but looked at in the large, they weren’t. And Epson failed to see the larger game. It didn’t anticipate the competitors’ reactions to its actions. If it had, it would have seen that it was much better off under the status quo.
In the Scope chapter, we’ll return to the important subject of links between games.
5. Rationality and Irrationality
People often imagine that game theory requires all the players to be rational. Everyone is out to maximize profits. Everyone understands the game. There are no misperceptions. Feelings of pride, fairness, jealousy, spite, vengefulness, altruism, charity never arise. That’s all very nice, but it’s not the way the world is. So much for game theory.
In many ways, people are right, or were right. Granted, the simple textbooks present a view of “rational man” that doesn’t apply very well to the mixed-up, real world of business. But that’s a problem with the textbooks. While early work in game theory didn’t talk much about rationality or irrationality, current work does. The textbooks simply haven’t caught up yet.
Early game theorists had good reason to spend little time worrying about irrationality. Game theory started out by analyzing zero-sum games, like poker and chess. In these games, failing to anticipate that the other player may make an irrational move doesn’t get you into trouble. If he does something irrational, that’s good news for you. Anything that makes him worse off must make you better off, since it’s a zero-sum game.
But games in business are seldom zero-sum. That means you can succeed together or fail together. When another player can take you down with him, you care about his rationality. Think back to the Card Game. How Adam and a student divide the $100 is zero-sum: if Adam gets more, the student gets less, and vice versa. But the fact that Adam and the student will both get nothing if they fail to reach an agreement makes this very much a non-zero-sum game. Either player, in hurting himself, hurts the other player, too. Each has to be concerned about the other’s rationality.
What Rationality Is — and Isn’t
It’s easy to get confused about just what “rationality” means. Here’s what it means to us: a person is rational if he does the best he can, given how he perceives the game (including his perceptions of perceptions) and how he evaluates the various possible outcomes of the game.
Two people can both be rational and yet perceive the game quite differently. One person may have better information than the other. But if the second doesn’t know what the first knows, he’s not being irrational in seeing things differently. The difference in information naturally leads to a difference in perceptions, even to misperceptions. People can guess wrong and still be rational. They’re doing the best they can given what they know.
Likewise, two people can both be rational and yet evaluate