Game Theory for Startups
Find the right partners, reference competition and affiliates.
Think of game theory as playing chess. You make your move based on your opponent’s strategy.
“Suppose” two companies, say Fido and Rogers, are competing to get the most users signed up to their network. And in doing so, they send out flyers to everybody’s mailbox in the GTA[1].
Let’s say that if only one of the companies advertise, that company will get 10 new users registered to their network. And if neither of them advertises, they both lose and end up with no new customers.
So when both companies advertise at the same time, many of their potential customers are annoyed with the influx of advertising and as a result each company only receives one user.
Which scenario is the best for both players? What decision would you take, and why?
What we’ll look at next is called the dominant strategy. Fido’s dominant strategy would be to advertise; since their payoff would be zero if they didn’t advertise. Similarly, Roger’s best move would be to advertise rather than not. Now, if they partnered up and one agreed to advertise in the summer and the other in the winter, they could theoretically reach a better payoff[2].
However, in reality, due to seasonal advantages, the breach of contract risk, and the fact that they compete for similar customers would make this hard to achieve.
It would make more sense for two recent startups, Coworkify and Zaask, to partner up since they each provide a variation on their positioning statements.
Coworkify is an online marketplace to buy and sell errands and tasks to those near you. The application is available on most mobile platforms and also offers the ability to share physical work spaces and offices. Zaask is very similar in proximity based searches with their website currently focused on the Portuguese-speaking community.
If Coworkify and Zaask shared conversion rates and coordinated on mailing campaigns, a friendly competition may bring out the best on both teams. This analogy would be similar to why ICT clusters (i.e. startup hubs) work. They bring out the best in you.
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[1]It’s easier to choose telecoms in this example due to their similar market reach, size and user base, but to try and apply this example to similar startups would often be comparing apples to oranges (given their frequent pivots, varying sizes and funding).
[2]Fido’s owned by Rogers, but is still operated as a separate entity. Another example would be Future Shop owned by Best Buy Inc., operated and managed separately but with the agreement of sharing benchmark scorecards and increased buying power among other things.