The Handbook of Behavioral Operations

7Behavioral Analysis of Strategic Interactions: Game Theory, Bargaining, and Agency

Stephen Leider

Ross School of Business, University of Michigan, Ann Arbor, MI, USA

Strategic interactions – circumstances where multiple parties, potentially with imperfectly aligned preferences, make decisions in a decentralized manner that affect some or all of the parties – are important for many different aspects of operations management. Firms in a supply chain need to set prices, decide on capacity, provide quality goods, etc. Customers joining a queueing system may need to anticipate the abandonment decisions of others. Managers in a production system can choose various incentive and monitoring policies to encourage workers to maintain productivity and quality.

This chapter will discuss three different sets of analytical tools commonly used in operations management to understand strategic interactions: game theory, principal–agent theory, and bargaining theory. Each tool is useful to understand different aspects of a strategic interaction. Game theory typically takes as given the nature of the interaction (e.g. the set of possible actions for each party and the payoff consequences of those actions) and asks what strategy we should expect each party to employ. Principal–agent theory considers cases where one party can shape the structure of the interaction (e.g. by establishing financial incentives for various outcomes or offering a menu of options that the other party can choose from) ...