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Ford wins the prisoners’ dilemma

2009-11-02

So, let’s imagine that you run a business. You and your two major competitors are looking at bankruptcy if sales trends continue, but the government offers you a deal to remain solvent.

You might think that it’s a simple question of solvency versus insolvency, but the smart player realizes that the decision to take a government bailout, or not to take one, might significantly change the sales forecast.

If all three take the bailout, then the sales figures are probably accurate. If none take the bailout, then little has changed. But if some take the bailout and some do not, the strategic situation has changed dramatically.

Ford made that bet, and won.

By refusing to take government money, they convinced US consumers that they were dedicated to success without handouts, and they became the car of choice for consumers looking to buy American.

It’s good to see a company rewarded for doing the right thing. It’s also a lesson for business students: Ford realized that the consequences of its decision were dependent on the decisions of others. So they were less concerned about their own decision, and more concerned about the decisions of their competitors. By correctly predicting that both Chrysler and GM would take government bailouts, Ford set themselves up for success by refusing. It was an ambitious decision that probably would have cost Alan Mulally his job if it didn’t work out.

These kinds of decisions fall into the statistical and economic realm of game theory, that tries to define which decisions will result in the highest payoff, considering the possible decisions of your competitors  (the “other players”). Game theory is a fascinating subject and any text on business economics can give you the essential elements.

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