When Game Theory Is Useful

Game Theory begs to be applied to the scenario described in a Knowledge@Wharton article “A Seasonal Sale Shift.”

The fourth paragraph opens like this:

With retailers pushing sales earlier and earlier and consumers waiting later and later to buy, Baker Retailing Initiative managing director Erin Armendinger compares the situation to the children’s game of chicken.

Chicken is, as we all know, a special application of the classic Prisoner’s Dilemma game – where the mutually agreeable situation is unstable, because both sides benefit from departing from it (as long as the other does not).

Not to mention the massive coordination failure between competing retailers: if a competitor starts offering markdowns, you have to as well or you’re screwed. Oh, the Betrand model, how easily you screw over retailers.

It’s a situation that begs for a game-theoretic analysis, but the article doesn’t even mention the phrase.

Also, they misuse the term “value proposition.” They’re conflating the idea of “value” (dropped wholesale by the profession of economics because it was too hard to pin down). The value proposition encapsulates the experience the customer has due to your product – rather similar to the famous Drucker quote “the world wants holes, not drill bits.” Price is always an aspect – especially in retail – but it’s not really related to the value proposition as such.

Now, retailers actually are changing their value proposition. From the article:

For example, apparel retailers have been changing their supply chains and inventory as part of what’s known as a "wear now" strategy. While in the past, suggests Armendinger, retailers rolled out merchandise for a new season on a particular day — changing to displays of sweaters and corduroy pants in the height of summer’s heat — many are now offering a balance of clothing so people shopping in August can still find shorts and short-sleeved shirts.

Funny how that works.