Strategic benefits of limiting your options

January 31, 2013

Game theory has given us many insights, but I was reminded of an important one when Cheap Talk linked to this classic clip from Dr Strangelove.

At the risk of killing a good joke, let’s return to the insight. In decision problems, where you choose the best of a set of options, you want as many options as possible. That’s not necessarily true in games. In a game, you might want to eliminate options for yourself that lead your opponent to make choices you don’t like. In the game of nuclear war, you’d like to guarantee a forceful response, because that deters an attack by your opponent. You do that by, somehow, eliminating the option of a weak response from your arsenal. In the movie, the device is a doomsday machine, which guarantees reprisal if attacked. In the clip, Russian ambassador Sadesky announces they have such a machine — but have kept it secret. Dr Strangelove gets the punchline: “The whole point of the doomsday machine is lost if you keep it a secret!”

The idea sometimes goes by the name commitment, because you’ve committed yourself to a specific strategy. In business strategy, the obvious application is entry deterrence: an incumbent firm commits to responding aggressively to new entrants, perhaps by lowering its price dramatically. The threat of this response is intended to deter entry. Like the doomsday machine, the hope is that it’s never used, but works nonetheless.

PS: Luis Cabral reminded me of the Dr Strangelove clip years ago when we were teaching the Firms & Markets course together. Also from his extensive game theory collection are this really good clip from the Princess Bride and this one from the Maltese Falcon.

PPS:  Luis notes that there really was a doomsday machine. The reason they kept it secret involves more game theory.

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