Game Theory at Work - A Case Study

From the time that Microsoft announced plans to acquire Yahoo, industry insiders marveled at the deftness displayed by the software giant in countering every move by Yahoo executives to prevent the takeover.

  1. When Yahoo turned to competitor Google for help, Microsoft had the government's anti-trust watchdogs on the case.
  2. When Yahoo put out feelers to News Corp (MySpace) as an alternate buyer, Microsoft announced that it was already in discussions with News Corp about a joint takeover of Yahoo.
  3. When Yahoo executives decided to dig in their heels and ride it out, Microsoft sweetened the deal for Yahoo investors, raising the threat of a stockholder revolt.

From the outset, Microsoft's acquisition team was two steps ahead in the game — not merely reacting to, but anticipating Yahoo's every move.

Yahoo executives may have thought this was exceptional foresight on the part of Microsoft. Instead, it was the practical application of game theory, a method of more accurately predicting the probable outcomes of strategic decisions. Using game theory, Microsoft was able to map and prepare for every possible twist and turn in the process months before it announced its intention to acquire Yahoo.