Sometimes it takes only one headline for an industry to stiffen its muscles and buckle up for a ride through a vast sea of uncertainty.  We live in the times of headlines aplenty, when executives and policy makers around the world are forced to adjust their course with decisions that will affect millions of constituents and consumers. It only takes a few minutes to scroll through any news outlet and receive at least three conflicting messages of when, where and how US tariffs will be imposed – and this has nothing to do with misinformation, it is simply the sheer speed of decision making. It is usually around these times that economists and mathematicians in the consulting industry are invited into the steering cabin to answer the captain’s questions on what the numbers say:  

• Do we stop our partnerships in the US, or do we need more partnerships in the US?
• When should we make our move – now, before any final decisions are made, or at the last possible moment?

And, at the bottom line of all those questions lies the siren song from the depths of every salesperson’s heart – quick, let’s renegotiate our pricing!

While these questions are all valid, that urge is often born out of a knee-jerk reaction to danger fuelled by survivors of past Odysseys. To the writers’ dismay, an oversaturation of consulting advice panders to that exact song and it echoes with an unhealthy dose of eagerness. We are here to dispel its allure – so let’s check our Game Theory guidebook and look at the top three most common-found siren songs that are lurking in the storm ahead.

The first: “Let’s follow the historical data and adapt our pricing strategy accordingly.”

The good intention is there, but it falls short of admitting its fatal flaw: survivor bias. Enterprises and businesses of today persevered through energy negotiations, crumbling supply chains and a locked-down population. As an outcome of those hard times, their prices had to be adjusted.  But truly speaking, price increases and negotiations were a byproduct of staying in the market after surviving, they were not the successful strategy itself. As a matter of fact, most businesses shrank or even filed bankruptcy during those crises despite adapting their pricing, and leaders of today should be wary of that when approaching these new tariff-infested waters. Adapting prices to the new tariff reality is the bare minimum that everyone will abide to, not a real strategy that will win in the new and changing environment. And here comes the next usual advice.

The second: “Renegotiate with all partners and suppliers”

Absolutely – negotiations can be the most effective step to take. But let’s not get ahead of ourselves: not all negotiations need to happen at the same time. It is not just a matter of resources, the order matters and the perception of success and failure as well. Imagine negotiating with the closest partner – if that fails even in the slightest, how can one face next a fiercer supplier? On the other hand, if an agreement ends in resounding success, maybe follow-up negotiations do not need to be as intense. In case you, the reader, are noticing an if/then pattern emerging in your mind, you are not mistaken: this complex game-tree with all your collaborators and competitors is what is called a value net, and it determines all connections and ideal steps to navigating a crisis.

Game-trees arise naturally in Game Theory for a reason: they map out reality in multiple branches, and they are quite precise in exactly those negotiations, bringing order out of the chaos. It is a mindset change in preparation for any negotiations to come: don’t ask should we raise our prices foreshadowing a yes that feels like a solution, ask instead how much should we change our prices if

• our suppliers raise theirs first by X?
• our competitors keep theirs stable?
• the US changes their tariff scheme again?

…and so on. Building a holistic strategy takes effort, and building rules into your strategy is a robust way to deal with chaos and uncertainty. That being said, there is such a thing as too much rigidity, which leads to perhaps the most counter-factual and dangerous advice of all.

The third and final song: “Negotiate as many safeguards as you can.”

Without clear safeguards for upcoming tenders, businesses can quickly find themselves caught in negotiations after a price shock so strong that the boat capsizes. So, the idea to negotiate contractual safeguards seems brilliant – and it can be. Think of dynamic pricing models, structured escalation clauses, volume flexibility, and so on; the complexity of pricing rules can only intensify until the contract yields under its weight. One can really map out all of the strategies into a pricing scheme. Alas, that’s sending a signal to the market and to the other members of the negotiating table: I know what can go wrong, and I do not want to share the pain. The result will always be the same once again as the prices increase due to risk premiums, all because of inefficient risk-sharing.

In the end, listening to the usual siren songs is a great exercise to grow business acumen, but following them just because they sound nice can prove fatal. It is exactly between the Scylla of over-rigidity and Harybde of chaotic decisions between where the sea of Game Theory expands.

If anything should ever make sense from this mythological analogy it is that sometimes, the best strategy can be to have responses ready, not do anything rash, and be aware that placing all the risk on your business partners can be the most expensive insurance policy.

Kostas Karampelas and Korbinian Borchert

P.S: If only we could bring all the methodology of Game Theory applied to US Legislation in a LinkedIn article, we would. But alas, if you want to hear more, you will have to reach out to us.