8.5 Game Theory Analysis
Build formal game models to analyze strategic interactions and design optimal mechanisms. Launch on platform.
What is it?
Dragonfly's Game Theory Analysis Lens translates messy strategic conflicts into tractable games (normal-form, extensive-form, Bayesian, repeated), computes equilibria and counterfactuals, and surfaces high-leverage interventions that reshape payoff structures and strategic outcomes. It makes incentives and credible threats explicit, quantifies trade-offs, and identifies payoff-shaping levers (contracts, rules, prices, norms) that move the system toward preferred equilibria through rigorous mathematical modeling and strategic mechanism design.
Why is it useful?
Make incentives and credible threats explicit rather than relying on intuition about competitive dynamics
Quantify trade-offs and identify which strategic moves provide the greatest leverage
Design contracts, rules, and institutional mechanisms that shift outcomes toward preferred equilibria
Analyze negotiation dynamics using bargaining theory to strengthen your position and deal structure
Test strategic robustness through sensitivity analysis and behavioral extensions
Understand how information, timing, and commitment devices change strategic outcomes
How does it work?
The Game Theory Analysis Lens applies systematic strategic modeling to translate competitive and cooperative interactions into formal games with actionable recommendations.
Game Model Specification and Equilibrium Analysis
Focus: Define players, strategies, timing, information structure, and payoffs, then compute Nash equilibria and subgame perfect equilibria
Example: Modeling pricing competition between two major airlines as simultaneous game, computing mixed strategy equilibrium that explains observed price volatility, and identifying conditions under which tacit coordination emerges
Commitment Devices and Credibility Analysis
Focus: Analyze which threats and promises are credible and design mechanisms that make commitments binding
Example: Revealing that competitor's threat to match any price cut lacks credibility due to capacity constraints, enabling aggressive market entry strategy with calculated risk of retaliation
Bargaining Theory and Coalition Analysis
Focus: Apply Nash Bargaining Solution and coalition game theory to optimize negotiation outcomes and surplus division
Example: Using Shapley value analysis to design fair revenue-sharing agreement among three joint venture partners based on their respective contributions to coalition value
Mechanism Design and Incentive Architecture
Focus: Design incentive-compatible mechanisms that achieve desired outcomes while respecting individual rationality constraints
Example: Creating auction format for spectrum licenses that maximizes revenue while preventing collusion, using sealed-bid second-price mechanism with reserve prices
Sensitivity Analysis and Behavioral Extensions
Focus: Test robustness of strategic conclusions under parameter changes and bounded rationality assumptions
Example: Analyzing how equilibrium shifts if competitor's discount factor increases (longer time horizon), revealing threshold above which cooperation becomes sustainable in repeated game
Strategic Recommendation and Implementation
Focus: Generate concrete action plans with contingencies, early warning indicators, and implementation pathways
Example: Recommending specific commitment device (public price guarantee) that transforms prisoner's dilemma into coordination game, with trigger conditions for strategy revision if competitor behavior deviates
Turning Game Theory Analysis into Action
Apply formal game-theoretic modeling rather than informal reasoning about competitive dynamics to reveal hidden strategic structure
Design mechanisms and commitment devices that reshape payoffs rather than accepting existing game structure as fixed
Create contingency plans based on equilibrium analysis with clear early warning indicators that signal when strategic assumptions require revision
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