Game Theory in the loyalty battle

Alan Mitchell is right to ask “How will the loyalty card evolve now?” (MW August 30). I think the application of the principles of Game Theory to the formulation of business and marketing strategy would be worthwhile.

Neumann and Morgenstern in their book, Theory of Games and Economic Behaviour, identified two types of games. The first is rule-based games where players interact according to specified rules of engagement. In the second type, freewheeling games, players interact without any external constraints. Business is a complex of both types of games.

By introducing their scheme first, Tesco stole the initiative from Sainsbury’s and broke the mould of destructive price competition. Tesco is now able to withdraw all other price-based incentives and effectively increase prices, boost margins and maintain the loyalty of customers.

The net effect is the creation of a win-win dynamic that breaks the destructive deadlock of price-based competition. Information gleaned from the cards will enable Tesco to build profiles on its customers and target specific groups.

This does not necessarily mean that Tesco is no longer in the grocery business. It is simply recognising that to continue succeeding in the grocery business it must create greater value for its customers.

The game of business is all about value: creating it and capturing it. Loyalty cards, by using powerful IT, allow just that to happen. It takes vision and leadership to grasp it.

Kofi Dwinfour

Director of marketing & public relations

London Guildhall University, London E1

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