Book review: Games Businesses Play

Given the centrality of game theory to an understanding of business strategy, it seems surprising to me that the incorporation of game theory into IO (the economics field of industrial organisation) is a relatively recent phenomenon. That was one of the things that I learned reading Pankaj Ghemawat's 1997 book Games Businesses Play. Ghemawat is now a professor at the Stern School of Business at New York University, but at the time the book was written he was a professor at Harvard Business School. And so, as you might expect, the book employs a case study framework to the use of game theory in business situations. However, the scope of the book (and case studies) is necessarily narrowed, to examples of 'commitment decisions'. You can think of commitment decisions as a decision to commit to a particular course of action. For example, choosing whether to open a new factory, expand production, or enter a new market, are all commitment decisions, as are the reverse (closing a factory, decreasing production, or existing from an existing market). Ghemawat explains this choice of scope as follows:

The focus on commitment decisions as the unit of analysis is only slightly less obvious... game-theoretic IO might reasonably be expected to have the most of contribute to business strategy in regard to such decisions.

The book includes six main case studies, ranging from short-run to long-run decisions, and decisions in both expanding and declining industries. To some extent though, the cases themselves are less interesting than the general approach, given the dated nature of the material. However, the cases are also quite technical (and in particular, quite mathematical). This is not a book for a casual reader looking to pick up some simple tips on business strategy derived from game theoretic insights. That Harvard Business School students might cope with these cases really demonstrates the gulf in ability between those students and the 'average' business school (even the average graduate business school) student.

Ghemawat sees the book and the case studies as providing value in particular to those studying or researching in strategic management:

Taken together, the detailed case studies in this book strongly suggest that researchers in strategic management should increase their (currently low) level of attention to game theory instead of simply focusing on differential efficiency.

Sadly, I have seen little evidence that this advice has been heeded (and I say this as a failed strategic management undergraduate student from many years ago, as well as having observed students in our School's case competition over many years, who often seem to give little consideration to game theory in devising strategies for their given case).

I learned a lot from the book, but I suspect most readers won't appreciate the detailed technical approach. Unless you have a strong mathematical background (or a willingness to skip over the mathematical models and hope to pick up the story again afterwards), I would suggest this is not the book for you.