Product Development · Product management

Relationship between game theory and new product development?

Tony Rajakumar Founder/CEO at SnugBoo

February 19th, 2016

I've been noodling on the links between developing new products and game theory. I couldn't find other material that linked the two, and so I wrote up a post on this athttp://metatony.posthaven.com/how-game-theory-can-inform-product-creation-and-management

I believe that game theory and specifically the Nash equilibrium offers a fruitful framework for thinking about how to create, shape and introduce a product. I'd be curious to know what others on FD think about the linkage between the two - would you agree or disagree? Is there research or papers that you've come across that speak more to this? I'd imagine some startups would find the development of their products to be a smoother experience by considering such a framework.
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Joe Emison Chief Information Officer at Xceligent

February 20th, 2016

I think your point that the status quo is a nash equilibrium point is a very good one, and one that too many founders ignore ("If I build it, they will come!"). It's a good way to describing the inertia you have to overcome to get people to adopt your product.

However, I don't think you really have any other observations in the piece that add much to the existing literature on product-market fit (which is really what you mean when you're talking about "adoption"). You don't need to think in game theoretical terms to understand that enterprises have multiple players, and I don't think it gets you anything new. 

And perhaps worse, game theory is inherently reductionist and assumes rationality (or at most bounded rationality), which I think is an extremely dangerous assumption for any entrepreneur. Even enterprise customers are not rational--for example, they tend to be irrationally risk-averse when it comes to buying new things or buying things from new companies.

Your point around payoff change I think is better encapsulated by Ben Horowitz's "10X" rule (from the Hard Thing about Hard Things). I am also dubious that you can count any form of adoption as a "new Nash equilibrium". That seems overly simplistic to me, because the reality is that whether or not you're at Nash equilibrium points will vary customer-by-customer; you'll have some that will be really sticky, and others that are more tenuous. 

Also even in successful organizations with successful sales efforts, I really don't think you ever get to some kind of stable Nash equilibria with most customers--it takes a concerted and ongoing customer success organization to keep retention above 90% for SaaS subscriptions, even B2B.