Archive: February, 2016

The power of game theory in procurement

The sequel to Let the games begin has been published in Supply Management. The power of game theory in procurement focuses on the application of game theory in negotiation. Game theory tells us that there are 3 factors that determine the outcome of negotiation.

Information

Knowledge is power, particularly in negotiation. Category management, requests for information and requests for proposals all enable buyers to gather more information. Once you’ve got the information then you can use the Nash Bargaining Solutions to identify the range of possible outcomes. The next question is whether to share this information, for example, whether to tell a supplier that he does not have the most competitively price or to conclude the negotiations and select the supplier. To help us answer this question, we can use the Prisoner’s dilemma.

Commitment

The strength of commitment on either side is heavily influenced by the information available. If the information shows that a lower price is achievable then there is a stronger reason to stay firm, and a greater likelihood that you’ll achieve it.

Time

Patience is a virtue in negotiation. Always allow enough time to negotiate properly and use the suppliers sales periods to your advantage. By working out your supplier’s limitations (information again) you can gain the upper hand and play it to your advantage.

Although we may not always be aware of it, game theory is something we all use in negotiation already; by understanding and applying it more effectively, we can use it to get outstanding results. Game theory should be considered an essential part of any procurement professional’s skill set because it can help provide clarity to the dark art of negotiation and significantly improve the buyer’s results.