Game Theory, License Raj and Bajaj Scooter

 

The idea of raising your own added value is natural. Less intuitive is the approach of lowering the added value of others.

-Barry Nalebuff in Use Game Theory to Shape Strategy

Game theory is used to shape strategy; one such game is lowering value of other player to raise one’s value.

Here is example; there are two players a professor and group of students. Professor has 25 black cards and group of 25 students have one red card each. One red card coupled with black card fetches Rs.100.

Let us see how professor and group of students bargain with each other.

Total value of 25 cards of professor is Rs.2500, while value of all 25 cards of students is Rs.2500, so total value of game is Rs.5000, but only Rs.2500 is available for distribution. In ideal case, Rs.100 will be distributed in ratio of .5:.5 i.e. professor will keep Rs.50 with himself and give Rs.50 to student, so professor will end up earning Rs.1250, while each student will end up getting Rs.50.

Now professor decides to play a different game. He publicly tears off 5 cards, so he is left with only 20 cards, so value of his cards comes down to Rs.2000, while that of students is still Rs. 2500. Professor’s strategy is to decrease the value of other player. One can earn only if one red card is coupled with one black card, by destroying 5 black cards, he has reduced bargaining power of students, as 5 students will now end up earning nothing. Now professor can ask for new split ratio of 9:1, so while total value has gone down, Professor will end up earning more i.e. 90% of Rs.2000 i.e Rs.1800 which is still higher than Rs. 1250 he would have earned in earlier case, while 20 students will consider themselves lucky to get Rs.10 each, rather than getting nothing. Here assumption is students are not able to get together.

This game can be played between organization and customer, management and employees etc.

Before liberalization of Indian economy under Narasimha Rao, Indian economy was under influence of leftist thinkers. They believed that Indian economy should be strongly controlled to prevent Indian citizens from getting exploited by capitalists. So industrialist had to get permission from government to start production, the permission was in form of licence, which decided how much an industrialist could produce. Result was production was insufficient to meet demands of customers, which meant that customer had to stand in queue for everything. Competition was discouraged, so producer could sell whatever he produced at premium. There was no concept of quality, design, customer service etc. as customer considered himself lucky if he just got product.

quality

Not all industrialists were against licence raj, some benefit by this strange arrangement esp. those in automobile industry. Ambassador Car, Premier Padmini Car, Bajaj Scooters etc. were such products, which had waiting list of customers inspite of poor design and quality.

bajajcar

Bajaj Chetak Scooter was one such product, at one stage if you wanted to buy this scooter you had to wait for 10 years! Not that it was a world-class product, but due to lack of competition and artificially controlled production, you had unusual demand & supply situation. In fact Bajaj scooter was anything but world class in terms of quality and design, one joke was to start scooter you had to tilt scooter to left and kick start it. Post liberalization, Ambassador Car, Premier Padmini Car and Bajaj Scooters closed production due to lack of demand while during same period demand for four and two wheelers went up dramatically.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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