Winning the Hardware Software Game Winning the Hardware-Software Game - 2nd Edition

Using Game Theory to Optimize the Pace of New Technology Adoption
  • How do you encourage speedier adoption of your product or service?
  • How do you increase the value your product or service creates for your customers?
  • How do you extract more of the value created by your product or service for yourself?



  • Game Theory Basics

    What Is Game Theory?

    Game theory is a tool that’s used to “map out” particular situations and figure out what is likely to happen under various scenarios.

    In some cases game theory is employed by means of modeling situations using mathematical equations. In these cases, the equations can be used either to solve for optimal solutions and/or to generate simulations to see how the situation plays out under different scenarios.

    However, game theory can also be employed using less rigorous methods. Most situations can be mapped out visually and textually, and then one can use those mappings to better understand situations and draw conclusions.


    When Can Game Theory Be Used?

    Game theory can be used in situations in which an entity’s payoff (profits, well-being, etc.) is dependent upon actions taken by other entities.

    As the world has become globalized and markets have accordingly become more interconnected and complex, game theory has become increasingly applicable to more and more situations. In particular, more situations have become characterized by global ecosystems, in which many players from different countries are involved to different extents and at different levels.

  • Group Entry and Exit: The Case of Brexit

    Merriam-Webster defines membership as “the state of belonging to or being a part of a group or an organization.”

    Being a (voluntary) member of a group generally confers both benefits and costs upon group members. The benefits and costs of group membership change over time, (i) as the environment – political, economic, social – changes, and (ii) as the composition of and dynamics between members of the group change. And as the benefits and costs change, existing members may be led to exit the group, while new members may be incentivized to join.

    This analysis examines:

    • The benefits and costs of being a member of a group,
    • The different types of groups, and
    • Group dynamics as the environment and group membership change.

    Figure 1


  • Has the Time for Electric Cars Finally Come?

    A recent article in the NYT, “Sites to Refuel Electric Cars Gain a Big Dose of Funds” by Nelson D. Schwartz,described the latest development in the evolution of the market for electric cars:

    Better Place, the closely watched start-up that hopes to create vast networks of charge spots to power electric cars, is set to receive a vote of confidence on Monday, in the form of $350 million in new venture capital.  Although Better Place will most likely require billions more in financing, this investment is an important step for the company...

  • How Companies Make Themselves Immune to Complaints about Bad Customer Service

    The US is a services-based economy, and US consumers demand good customer service. Customers have increasingly been using social media to publicize incidences of bad customer service, and many customers use online reviews to determine which businesses to patronize. All of this suggests that companies providing bad customer service should be forced either to improve or to go out of business. Yet, in many cases, lousy customer service has been able to persist without causing businesses significant financial harm. How can this be?

    You see this situation, for example, in cases of:

    • Airplane flight delays or cancellations or lost luggage;
    • Utility service continuity or billing problems;
    • Retailer exchanges or returns; and
    • Food Services ordering problems or problems with quality of food or service.

    This analysis examines the Customer Service Game and seeks to understand how businesses can continue to profit despite having chronic customer service problems.

  • How Do Bricks-and-Mortar Retailers Compete with the Internet?

    Follow Apple’s Lead?

    Establish an Online Presence?

    Product Differentiation

    Offerings with Online Advantage

    Offerings with neither Online nor Offline Advantage

    Offerings with Offline Advantages



    I wrote a previous blog entry on retailing competition between offline and online stores, Will Smartphone-Enabled on-the-Spot Price Comparisons “Upend” Stores’ Business Models?This blog entry takes the previous analysis a step further and considers more explicitly how offline stores might be able to compete with Internet providers. In particular, this examination considers the increasing tendency of consumers to use bricks-and-mortar stores to test out new products, but then buy the products at lower prices on the Internet. How can bricks-and-mortar stores prevent such free-riding or otherwise continue to sustain viable businesses despite the existence of lower prices on the Internet?

  • How Do We Conquer Fake News?

    “Fake News” has become one of the big afflictions of our times. I just Googled the phrase “fake news,” and it generated 174 million hits. No one seems to know anymore whether or not any reported information is true and/or accurate. This has led people to question the truth of everything, particularly if they don’t like what’s been reported.

    Trust in mass media as a whole is declining rapidly across the board. In 1976, 72% of the population had either a great del or a fair amount of trust in mass media. By 2016, that figure had declined to 32%. From Art Swift, “Americans' Trust in Mass Media Sinks to New Low” (and see Figure 1)

    Americans' trust and confidence in the mass media "to report the news fully, accurately and fairly" has dropped to its lowest level in Gallup polling history, with 32 saying they have a great deal or fair amount of trust in the media. This is down eight percentage points from last year.

    Gallup began asking this question in 1972, and on a yearly basis since 1997. Over the history of the entire trend, Americans' trust and confidence hit its highest point in 1976, at 72...

    Figure 1

    1 trust media 

    Access to true and accurate reporting of news and information is pivotal for justice and democracy to prevail. Yet, it’s become extremely difficult to ferret out the truth from news and information reports. How can we address this problem? That is, how do we encourage people to report complete and accurate information?

  • How Do We Defend Against Rogue Drones?

    I’ve been reading a lot about drones, and the more I read, the more I’m convinced they’re going to cause a lot of problems, for everyone – citizens, businesses, and government alike.


    Here’s some background information that lays out some relevant issues.


    •  Drones are available to anyone.

    Drones are cheap to buy, and they can be built from off-the-shelf parts (see, for example “Building a Drone vs Buying One – Which is Best?”). So while the government could theoretically “require” people to register drones, there’s no way to enforce that requirement.


    •  It is difficult to identify drone owners and thus their intent.

    In this sense, drones are similar to cyberattacks. In “Marching off to cyberwar,” The Economist indicates that

    A cyberattack on a power station or an emergency-services call centre could be an act of war or of terrorism, depending on who carries it out and what their motives are.

  • How Regulations Shape the Cannabis Industry


    The cannabis industry is highly regulated, and the various regulations play a powerful role in shaping the structure, and thus outcome, of the industry. This analysis examines the following questions:

    1. How do cannabis market regulations shape market structure?
    2. Are the resulting outcomes favorable to suppliers and/or consumers?
    3. What are the pros and cons of vertical integration in cannabis markets?

    Players: Who They Are and What They Want

    Let’s start by considering who the major players in the cannabis game are – the Suppliers, the Regulators, and the Customers, plus the Distributors and Testing Labs – and what they seek by participating in the cannabis industry (see Figure 1). It’s important to understand what each party wants because the what they want, together with the extent to which they’re getting what they want, will determine (i) how well they follow the rules and (ii) the actions they might take if they decide not to follow the rules.

    Figure 1

    1 mj game 


    Cannabis Suppliers

    The players who supply product in the cannabis industry include Cultivators, Processors/Manufacturers, and Dispensaries. The Suppliers provide the products that Customers purchase and consume. Cannabis Suppliers care about three issues in particular:

    • Suppliers want to run profitable businesses, which means they must be able to generate revenues that cover their costs.
    • Suppliers want to comply with laws and regulations so they don’t lose their licenses to operate.
    • Suppliers want to differentiate their products to attract Consumers. The primary modes of product differentiation include offering nuanced products, creating product brands, and educating Consumers.

    Distributors and Testing Labs

    Distributors and Testing Labs grease the wheels of the industry. Without appropriate distribution and testing services, compliant products cannot make their way through the supply chain from Cultivators to Processors and Dispensaries to be sold to Customers. Distributors and Testing Labs care about two issues in particular:

    • Distributors and Testing Labs want to run profitable businesses, and
    • Distributors and Testing Labs want to comply with laws and regulations so they don’t lose their licenses.

    When there are enough Distributors and Testing Labs to create competition, then

    • Distributors and Testing Labs want to differentiate their products to attract Customers.

    State and Local Governments (Regulators)

    The State and Municipal Governments are the regulators. Governments use state and local laws and regulations to achieve two goals: (i) ensuring all activity is tracked and taxes are paid, and (ii) ensuring cannabis activity does not intrude upon local communities.

    • State and Municipal Governments want to make sure all product is accounted for, only licensed activity occurs, and all taxes are paid.
    • State and Municipal Governments want to make sure cannabis activity is inaccessible to minors and nonintrusive to local communities.


    Consumers of medical and recreational cannabis want cannabis products that are safe to consume and that are reliable in providing the expected effects. Also, finding the “right” cannabis product to meet a particular Consumer’s needs is no easy task. So then once a specific product is found that provides the desired effects, the Consumer wants to be able to continue to purchase the same product from dispensaries. What we have, then, is

    • Consumers want product safety.
    • Consumers want product variety.
    • Consumers want product continuity.
  • Hurdles to Mainstream Adoption of Medical Cannabis

    Based on the incentives facing different players in the US medical cannabis market, I believe the market will not achieve mainstream adoption unless or until the US overcomes several hurdles: (i) the classification of cannabis as a Schedule I drug, (ii) cannabis’s lack of FDA approval, (iii) the lack of clear information about and trust in cannabis as a safe and medically efficacious product, and (iv) the social disapproval of cannabis use by a significant portion of society.

    Players in the Medical Cannabis Game

    Let’s start by examining the incentives facing the main participants in the medical cannabis market.

    hurdles to adoption

  • Information Distortions on the Internet

    “Honest” Distortions of Information on the Internet

    Not-So-Honest Distortions of Information on the Internet

    Propagation on the Internet Promotes Distortion of Information

    Governments Use the Internet to Spread Propaganda and Misinformation

    Defenses Against Information Distortion

    Consequences of Information Distortion



    We all know there’s a lot of misinformation on the web. I started reading about this, and I soon discovered that the subject is a lot more complex that I had initially thought. There are two issues that I found particularly interesting:

    1. The distinction between “honestly” inaccurate or manipulated information and purposely inaccurate or manipulated information; and

    2. The dynamic surrounding how information becomes distorted as it passes from user to user on the Internet.

    This analysis discusses (i) each of these two issues, (ii) defenses against being a victim of misinformation, and (iii) consequences of the increasing prevalence of misinformation on the Internet.

  • Intangibles and Context Will Increasingly Differentiate Winners from Losers

    You’re hungry and ready to eat. What’s for lunch?

    What you choose to eat depends on your environment, that is, the context in which your desire to eat occurs: Where you are, what’s available nearby, what you like to eat, how much money you have, how hungry you are, and so on.

    Imagine the first guy who opened a restaurant. Without any competition, he didn’t have to offer a very large variety of food, nor even make it taste very good for that matter, to win people’s business. On the other hand, someone who opens an eatery today in San Francisco better offer a fantastic dining experience; otherwise her business will crash and burn. Not only must she offer fantastic food, but her eatery must be open whenever people want to eat; she must provide a clean and welcoming venue, offer fantastic service to diners, not to mention delivery for people who want to eat at home; and she must do all this while still maintaining reasonable prices.

    In today’s world, competition for customers of most goods and services has become fierce, indeed. Over time, more information and better technology have enabled suppliers to better determine their customers’ needs and tailor goods and services provided to more completely meet those needs.

  • Is Apple's Ecosystem Successful Because of or In Spite of Apple?

    Does Apple Dominate the MP3 Player & Smartphone Markets?

    Apple iPod & iPhone Sales Timeline

    How Did Apple Manage the Growth of Its Ecosystem to Create Value?

    Would Even More Value Have Been Created If Apple’s System Had Been Open?


    A recent article in Newsweek, “Think Really Different” by Daniel Lyons, laments the fact that Apple’s ecosystem is a closed system, which represents paradigm shift from the prior, open system the PC industry and post-Internet world had evolved into:

  • Is Our Economy Playing the Demand Side or Supply Side Game?

    Which actions should government take to spur economic activity during economic recessions?

    Liberals tend to believe in Demand Side Economics, that is, demand drives the economy. So during recessions, government should stimulate demand through spending. Conservatives, on the other hand, tend to believe in Supply Side Economics, that is, supply drives the economy. In that case, during recessions, government should stimulate supply by promoting new production.

    Who’s right?

    Figure 1

    1 d v s 

  • Is the Autonomous Vehicle Ecosystem in Balance?

    The Technology Triangle

    Years ago I attended a meeting on intellectual property (IP). One of the speakers, a sharp IP attorney named Pat Ellison, gave a talk, which greatly resonated with me. He said that a successful technology requires a balance between technology, business, and law, as represented by the triangle in Figure 1. (I recently contacted Pat about the origin of this idea and he said he was fairly sure that the idea was developed collaboratively with others, but he couldn’t remember who the other contributors were.) Very succinctly, descriptions for the requirements are:

    • Technology: The technology must work well.
    • Business: The technology must be cost effective, that is, is must able to be manufactured and sold for a profit.
    • Law: The legal and regulatory underpinnings of the technology, including intellectual property foundations and liability issues, must be sound.

    A successful technology will exhibit balance in each of the three areas in the sense that if any of the three is too weak – the technology doesn’t function well, the technology cannot be sold for a profit, and/or the intellectual property is invalid or ineffective or other regulatory issues have not been settled – then the technology will not become commercially successful.

    Figure 1


  • Making Sense of the Currency Wars


    Basic Macroeconomic Relationships

    The Quantity Theory of Money

    Purchasing Power Parity

    Interest Rates

    Gross Domestic Product

    Putting It All Together

    Data for Select Countries

    Exchange Rate Basics



    Pros and Cons of a Strong or Weak Currency

    Why Depreciate One's Currency?

    Methods for Depreciating a Currency

    Currency Wars

    Definition of Currency War

    Definition of the Currency Game

    The Disadvantages of Currency Manipulation

    Other Comments on Currency Wars




    Currency wars have been all the rage lately. 

    Paul Krugman, is an economist, a Nobelist, in fact, who I respected greatly when I was in graduate school, studying his work on international trade.  However, over the past several years, I’ve come to view him as a complete sell-out, and as someone who twists economists (both theoretical and empirical) to promote his own completely tainted viewpoint.  In his Feb 15, 2013 NYT blog entry, “Currency War Confusions”, he wrote:

    OK, people have been asking me where I stand on the “currency war” issue. My answer is that it’s all a misconception, and it would be a very bad thing if policy makers take it seriously.

    First of all, what people think they know about past currency wars isn’t actually true. Everyone uses some combination phrase like “protectionism and competitive devaluation” to describe the supposed vicious circle of the 1930s, but as Barry Eichengreen  has pointed out many times, these really don’t go together. If country A and country B engage in a tit-for-tat of tariffs, the end result is restricted trade; if they each try to push their currency down, the end result is at worst to leave everyone back where they started.

    And in reality the stuff that’s now being called “currency wars” is almost surely a net plus for the world economy. In the 1930s this was because countries threw off their golden fetters — they left the gold standard and this freed them to pursue expansionary monetary policies. Today that’s not the issue; but what Japan, the US, and the UK are doing is in fact trying to pursue expansionary monetary policy, with currency depreciation as a byproduct. Expansionary policy is what the world needs, so why is this a bad thing?

    True, Europe may feel that it’s suffering a loss of competitiveness. But there’s an answer for that: emulate the other advanced countries, and have the ECB join in the expansion. Indeed, if fear of an overvalued euro finally undermines the ECB’s monetary hawks, that’s good for everyone.

    When it comes to currency depreciation, right now the only thing we have to fear is fear itself.

    Personally, I couldn’t disagree more.  I believe that the current “Currency wars”, far from being “almost surely a net plus for the world economy”, instead represent a classic prisoner’s dilemma game, in which the whole world is going to end up much worse off than before, with much higher prices, much higher inflation, and much greater uncertainty in world markets.

    This blog entry, “Making Sense of the Currency Wars”, makes this case.

    I tried to make the dry basic economics stuff at the beginning as brief as possible, while still being comprehensible.  Like most things in life, you have to get through the dry, boring basics before you can appreciate the good stuff.  For those of you who are already familiar with the basics, feel free to skip to the latter part of the analysis.

  • Managing the Global Commons, with a Focus on Outer Space, Part 1

    This analysis, Managing the Global Commons, with an Emphasis on Outer Space, has three parts:

    * Part 1: Description of the Commons

    * Part 2: Methods of Management

    * Part 3: The Case of Outer Space

    A copy of the full analysis can be downloaded by clicking on the link at the bottom of this blog entry.


    Part 1: Description of The Commons


    Definition of The Commons

    Wikipedia defines the commons as

    …[T]he cultural and natural resources accessible to all members of a society, including natural materials such as air, water, and a habitable earth. These resources are held in common, not owned privately.

    And it defines global commons as (emphasis mine)

    …[I]nternational, supranational, and global resource domains in which common-pool resources are found. Global commons include the earth's shared natural resources, such as the deep oceans, the atmosphere, outer space and the Northern and Southern polar regions, the Antarctic in particular. Cyberspace may also meet the definition of a global commons.

  • Managing the Global Commons, with a Focus on Outer Space, Part 2

    A copy of the full analysis can be downloaded by clicking on the link at the bottom of this blog entry.


    In Part 1: Description of the Commons, I provided a definition of the commons, together with graphical depictions of commons situations. I also defined the concept of Common Heritage of Mankind.

    Now that we have a clear definition of the types of situations we're dealing with, we can move on to trying to figure out how to manage them.


    Part 2: Methods of Managing the Commons

    The commons represent situations of market failure, due to the presence of negative externalities. Left to their own devices, free markets associated with use of the global commons will generally result in situations of overuse, relative to the socially efficient level. Historically, economists have proposed various forms of public intervention into the free markets to better manage the commons, including the imposition of taxes or quotas or the designation of property rights.

  • Managing the Global Commons, with a Focus on Outer Space, Part 3A

    A copy of the full analysis can be downloaded by clicking on the link at the bottom of this blog entry.


    The Case of Outer Space

    Now that we have all the boring basics out of the way, we can move onto the good part — the analysis of Space: the Final Frontier!

    This section starts off with an overview of the size and distribution of man’s activities in outer space. It then uses the analyses presented in the previous section (Methods of Managing the Commons) to propose some principles for the management of human activities undertaken in outer space generally.

    The next blog entry will discuss the specific cases of the management of (i) space traffic and (ii) orbital debris.


    Distribution and Size of Space Activity

    A few statistics as to the size and distribution of activities in space are presented here, courtesy of The Tauri Group, “2014 State of the Satellite Industry Report.”

  • Managing the Global Commons, with a Focus on Outer Space, Part 3B

    A copy of the full analysis can be downloaded by clicking on the link at the bottom of this blog entry.


    The Problem of Space Traffic Management


    Description of the Problem

    As we saw in the previous section, Distribution and Size of Space Activity, satellite activity encompasses a large portion of space activity. The primary function of satellites (displayed in Figure 6) is the provision of communications and information services. The ongoing provision of such services by satellites requires the use of two forms of common pool resources in outer space: (i) slots in LEO or GEO in which to orbit and (ii) room in the radiofrequency spectrum in which to transmit and receive signals.

  • Overview of Technology System Dynamics

    This is a presentation I’m preparing for “Tech Startup Conference: Artificial Intelligence” being held on September 26, 2017.

    1. Issues Covered

    • Adoption of New Technology Systems: What does it take for new technologies to become successfully adopted in the marketplace? Why do some technologies become adopted while others do not?
    • Value Creation: How do the components of the system combine to create value for the different players? Can the environment be changed so that the system will create more value?
    • Value Extraction: How much value does each player extract? In particular, are players extracting as much value from the system as they can?