Abstract-- An analysis of supply chain politics can benefit from applying game-theory concepts extensively.

Game theory, according to the Stanford Encyclopedia of Philosophy, studies the ways in which strategic interactions among rational players produce outcomes with respect to the preferences (or utilities) that none of those players might have intended. In simpler terms, game theory tries to explain the results of interactions between people or groups whose motives are opposed, or at least not identical. As used here, "game" is a metaphor for any human interaction: from war, to politics, to business.

During the past five years, the idea of Game Theory has entered popular culture, most notably in the book and film A Beautiful Mind. The applicability of game theory to supply-chain management is just starting to be recognized. In this analysis of the dynamics of supply-chain relationships, I use a game-theory exercise known as the Prisoner's Dilemma.

In the Prisoner's Dilemma game, two imprisoned suspects are questioned separately about a crime they perpetrated together. The two suspects have a choice: Each may give evidence against the other, or both may say nothing.

If both say nothing, they receive a slap on the wrist and are freed due to lack of evidence. If one gives evidence of the crime and the other says nothing, the first goes free and the second is severely punished. If both give evidence, both are severely punished.

The overall best strategy for the two suspects is for both to say nothing. However, not knowing what the other will do, each prisoner's individual best strategy is to confess and present evidence, which is the worst possible outcome for the two of them.

The suspects' dilemma here is that, no matter what the other does, each is better off confessing than remaining silent. However, the result when both confess is worse for each than the outcome if both had remained silent.

Game theorists use this exercise to study conflicts between the self-interest of individuals and the group. A group whose members pursue what seems to be sensible self-interest may end up worse off than a group whose members act contrary to rational self-interest.

Click here to view more current news articles