When Businesses Should Be Honest


Like kidnappers and blackmailers, businesses have a greater incentive to treat their customers fairly if they plan on playing their game again. Consider Figure 4. The customer first decides at A whether to take his business to Acme. If the customer goes to Acme, then at B Acme can either exploit the customer or treat him fairly. If Acme takes advantage of the customer, it gets a profit of $1,000; if it treats the customer fairly, it earns only $100. If Acme intended on playing this game only once, it would always take advantage of the customer at B. In a one-shot game, the customer should never believe Acme’s promise to treat him fairly because Acme would always benefit from cheating. Knowing this, the customer at A would not go to Acme. Interestingly, if the business could guarantee its honesty, it would make a $100 profit. Since the customer knows Acme is self-interested, however, the customer won’t trust Acme, and so Acme will get nothing.

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Figure 4

One might ask, “since Acme suffers from its own dishonesty, wouldn’t Acme really benefit from treating the customer fairly at B?” If the customer at A did go to Acme, Acme would maximize its profit by cheating the customer. Unless the customer has a time machine, Acme’s decision to cheat the customer at B can’t influence the customer’s decision at A because B takes place after A. Consequently, no matter how much Acme promises to be nice, the customer should never believe Acme because Acme’s promise lacks credibility. Yes, this result makes everyone worse off, but game theory land is often an unpleasant place.

Games like the one depicted in Figure 4 are commonplace, and often the business won’t exploit its customers. Fear of lawsuits keeps a few businesses honest. The expense of lawsuits makes it impractical for most consumers to sue, however, so implicit legal threats don’t deter many businesses from cheating consumers. The true catalyst of business honesty is repeated play.

If Acme plans to play the game in Figure 4 over and over again, then Acme probably shouldn’t take advantage of a customer. If Acme were to cheat a customer at B, it would do better for that one game. In future games, however, customers would abandon a dishonest Acme. Consequently, a completely selfish and greedy Acme would profit from treating its customers fairly and honestly.

Repeated play doesn’t guarantee honesty, though. A firm that could make enough through cheating today should be willing to sacrifice its reputation. For example, imagine that your company considers placing a massive order with a supplier that has always treated you fairly in the past. If the supplier could benefit enough by cheating you this one time, then it should sacrifice its reputation in favor of short-term profits. Also, if a firm develops a short-term time horizon because, say, it’s about to face bankruptcy, then it might cheat you today even though it has always been honest in previous dealings.

In our personal relations we usually assume that someone is either “good” or “bad.” If someone has always been nice to us, we generally believe that her type is “good,” so she will continue to treat us fairly. In business, however, companies don’t have types so much as interests. A firm might have treated you honestly in the past because being honest had served its interests. If these interests change, however, then you should not use the company’s past behavior to predict its future actions.

You should always consider what a firm would lose if it took advantage of you. The firm would probably lose your future business, but would this be significant enough to matter? It might suffer a loss in reputation, but will it be around long enough to care?

Companies invest in brand names to prove their trustworthiness. A company that spends millions of dollars promoting its brand name obviously cares about its long-term reputation and won’t decimate its brand-name’s worth through the short-term exploiting of customers. An expensive brand name is a hostage to honesty—a hostage that dies if customer trust is lost.




Game Theory at Work(c) How to Use Game Theory to Outthink and Outmaneuver Your Competition
Game Theory at Work(c) How to Use Game Theory to Outthink and Outmaneuver Your Competition
ISBN: N/A
EAN: N/A
Year: 2005
Pages: 260

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