"Game Theory in Geopolitics: How Are Countries Using Strategic Games to Analyze Geopolitical Actions?"

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1.INTRODUCTION

This whitepaper aims to present a clear representation of how concepts like game theory and the payoff matrix can be implemented in strategic wargaming and geopolitical decision-making. As part of this exercise, we have chosen to present the cases of Germany vs the Soviet Union, the USA vs the Soviet Union, an example demonstration involving Netflix and Amazon Prime Video, and concluding with a case study on China’s desired reunification of Taiwan.

2.STRATEGIC WARGAMING, GAME THEORY, AND THE WARGAMING PROCESS:

a) Strategic wargaming

Strategic wargaming utilizes the concepts of game theory by simulating and pressure testing multiple scenarios.

•Helps shape the vision of an organization through dynamic simulation visualized over medium and long-term.

•Allows pressure testing and refining a strategy prior to implementation:

I)Market shakeups – Regulator fines/ rules, New deep-pocket entrant, Cyberattack, Technological shift.

II)Black swan events – Covid-19, Russia-Ukraine war.

III) Aids in formulation of offensive and defensive strategies that could include joint ventures or alliances or vertical and horizontal integrations.

IV)Simulating actions of the market players and the reactions/ preemptive moves of the incumbent:

i) Competitors, Customers, & Suppliers

ii)Government & Regulators

iii)Executive Management (Incumbents & Challengers)

iv)Media & Unions

V) Iterative process where the outcome of the previous round establishes the conditions for the next one – thus, identifying an organization’s dominant strategy.

b) Game theory

•Payoff matrix: A table in which strategies of one player are listed in rows and those of the other player in columns. The cells show payoffs to each player such that the payoff of the row player is listed first.

• Best response and dominant strategy: A player’s best response is a strategy that has the greatest payoff for the player given actions of the other players. A dominant strategy is the course of action that results in the highest payoff for a player regardless of what the other players do.

•Nash Equilibrium: Determines the optimal solution in the game theory in which each player lacks any incentive to change their initial strategy. A game may or may not include a Nash equilibrium.

c) Wargaming Process:

•Project Scoping: Define problem statement and assess current market state and solutions.

•Quantitative Analysis: Perform stakeholder analysis and analyze market in terms of size, structure, and competitors.

•Simulation Design: Define simulation elements (players and responsibilities) and design simulation structure.

•Simulation Testing: Test simulation models and review administrative processes and planning.

•Competitive Simulation: Run model and consolidate insights from market reactions to adjust strategies

•Validation of Preferred Strategy: Validate preferred strategy and analyze output and insights from simulations.

3.EXAMPLES – STRATEGIC WARGAMING AND GAME THEORY IN BUSINESS DECISIONS:

High level pathways to represent how through nested games one familiarizes with all eventual outcomes of the decisions taken during the process or life of an organisation.

DOMINANT STRATEGY

PAYOFF MATRIX

The payoff matrix lists the payoffs for each combination of own and competitor moves. •       Netflix has a clear dominant strategy to cut prices. •       Prime Videos has a dominant strategy to hold prices. There is only 1 Nash equilibrium, i.e., Netflix cuts prices and Prime Videos holds prices. Once at Nash equilibrium, the players do not have any incentive to move away from this situation.

In nested games, multiple games are played in iterations to visualize the reactions and dominant moves of the competitors or the market forces. •       At the first and the second rounds, Netflix decides to cut prices and Prime Videos continues to hold the prices. •       In the third round, Prime Videos decides to add content; all offered at same prices. In the fourth round, Netflix reacts with adding new content, though offering them at lower prices, a strategy undertaken in the first round. This results in margin pressures for Netflix.

4.REAL WORLD WARGAMING EXAMPLES IN GEO-POLITICS:

a) World War 2: Germany vs Soviet Union – Operation Barbarossa:

b) Space War – USA vs USSR:

•n October 1957, USSR becomes the first country to launch an Earth orbiting satellite, Sputnik. Post Sputnik, USSR follows it up with the launch of Sputnik 2 which carried a living dog.

•While the US responds with the launch of an Earth orbiting satellite, they use game theory strategies to assess the future moves.

•If the US chooses to attempt a lunar orbit satellite launch, USSR will choose to either launch a lunar satellite or develop a manned spacecraft in Earth’s orbit, since USSR already had a lead in satellite launch race.

•Alternatively, the US may focus on launching a communications satellite useful for broadcasting, increasing telecommunication lines, and connecting Europe and North America, having a higher long-term payoff.

•Hence, the US launches the first commercial communication satellite Intelset 1, that also benefits USSR in the future.

•In July 1969, USA became the first nation to successfully land a manned spacecraft on the Moon. Before USSR attempts the same feat, they may use game theory strategies to see if it would be beneficial.

•Assuming USA and USSR are the only competitors; if USSR chose to attempt a lunar landing, USA would then choose to either embark on an unmanned Mars exploration or a new lunar landing.

•Alternatively, USSR may focus on building a space station, which may have different payoffs for both the USSR and the USA.

•In this situation, the USSR’s payoff was higher by building the first space station. In 1971, USSR did launch a space station which became the core segments of the International Space Station in 2000 (~ 30 years later).

5.POTENTIAL CHINESE INVASION OF TAIWAN:

China’s attempt to control Hong Kong resulted in instability in the region and plunged them into recession in 2019. Recent unification push with Taiwan begs if China will attempt the same again.

China’s quest towards reunification with Taiwan:

• China has been pushing for unification with Taiwan which Taiwan has repeatedly rejected.

•While China has hinted on its plans to encroach Taiwan's borders, Taiwan has also increased its military and political ties with regional allies and the US.

•The allies have agreed to provide Taiwan with arms, ammunition, and military advisors.

•In August 2022, Speaker of the US House of Representatives, Nancy Pelosi, visited Taiwan to showcase US’ support for Taiwan's democratic status.

•In response, China conducted live-fire military drills in six exclusion zones encircling Taiwan, which crossed into the island’s territorial waters and threatened to disrupt airline and shipping traffic in the Taiwan Strait - one of the world’s busiest trade routes.

•In conclusion, while a Chinese invasion of Taiwan cannot be completely ruled out, it remains an extremely risky and potentially disastrous proposition for Beijing.

•The military challenges involved in launching a cross-strait amphibious invasion are immense, and the potential costs in terms of losses, international condemnation, and long-term strategic setbacks could outweigh any perceived benefits.

•Taiwan's defensive capabilities, backed by implicit U.S. support, pose a formidable deterrent.

•Ultimately, much will depend on the calculations and risk appetites of Chinese leaders. An increasingly powerful and confrontational China under Xi Jinping may see greater incentives to attempt to take Taiwan by force.

•However, more prudent voices may prevail, recognizing that successful governance of Taiwan after an invasion could prove nearly impossible. For now, the threat of force likely remains a means of deterring perceived provocations rather than an immediate course of action.

•Barring a rapid shift in the military balance or a dramatic crisis, the Taiwan Strait appears more likely to remain an arena of escalating tensions rather than outright war.

Meet the thought leader

Vamsi is a mentor at GGI, and has a diverse background that includes being a former McKinsey employee and a graduate of IIT Madras. He possesses a broad skill set encompassing strategy and operations, gained from his various roles and industry exposure.

Meet The Authors (GGI Fellows)

Pranav Krishna is a Merit Scholar Undergraduate at the University of Warwick, where he is currently pursuing his Bachelors of Arta (Honors) in Politics and International Studies. Pranav is keen on dissecting the cross-section between public policy and global entrepreneurship. Having interned at the Centre of Energy Equality, DPD UK, and Building Future Leaders UK as a Student Consultant and Project Leader, Pranav wants to break into the strategy consulting industry to further explore his interests within industry.

Khrish is an intuitive public policy professional trying to achieve the overarching goal of facilitating socio-economic development in India. He holds a bachelor’s degree from the University of Southern California and currently works as a Parliamentary Engagement Associate at Swaniti Global.

An active volunteer for various causes and previous experience working with International Organizations, Governments, and NGOs in global and diverse settings. Sharp research, analysis, and interpersonal skills, stemming from experience in managing programs and engaging stakeholders not only from the government and private sector but also refugees, low-income communities, women, and children.

Ameesha is a Senior Analyst in Strategy and M&A consulting at Transjovan Capital Advisors with her expertise spanning the UK, US, and APJ markets. Her areas of specialization include formulating go-to-market strategies, performing market assessments, and overseeing commercial due diligence (CDDs) in the utilities, industrial, metals and mining, and sustainable waste management sectors.

She holds a bachelor’s in finance and Investment Analysis from Delhi University and is also a candidate for CFA Level 2. She also serves as a Mentor for Enactus India, driving solutions for long-term impact, and as a Co-Chair of Office of Career Services at Global Governance Initiative.

If you are interested in applying to GGI's Impact Fellowship program, you can access our application link here.

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