Game Theory

Game Theory is a branch of mathematics that studies strategic interactions — situations where your best decision depends on what other people decide. Developed by John von Neumann and John Nash, it provides frameworks for understanding competition, cooperation, negotiation, and conflict. In business, it explains pricing wars, market entry decisions, partnership dynamics, and platform strategies.

1. Identify the players — Who are the decision-makers? This could be competitors, partners, customers, or internal teams.
2. Map the strategies — What actions can each player take?
3. Determine the payoffs — For each combination of strategies, what does each player gain or lose?
4. Identify the game type:

• Zero-sum: One player's gain equals another's loss (pure competition)
• Non-zero-sum: Both players can gain or both can lose (most real situations)
• One-shot vs. repeated: Will you interact once or many times? Repeated games favor cooperation.
• Simultaneous vs. sequential: Do players decide at the same time, or does one go first?

1. Find equilibria — Look for Nash Equilibria: outcomes where no player benefits from unilaterally changing their strategy.
2. Choose your strategy:

• Dominant strategy: Best regardless of what others do (rare but ideal)
• Tit-for-tat: In repeated games, start cooperative and mirror the other's behavior
• Commitment devices: Make your intentions credible to influence others' choices

• Nash Equilibrium: Both cut price (neither can benefit by raising alone) → suboptimal for both
• Better strategy for repeated games: Signal commitment to value-based pricing. Compete on features, not price. Avoid triggering a race to the bottom.

Game Theory helps you think strategically about decisions where other players' actions affect your outcome. It reveals why cooperation often beats competition, why commitment matters, and how to avoid destructive equilibria.