Game Theory is a discipline of modelling situations where multiple players make decisions in an attempt to maximize their returns.
For example, many decisions in business distill down to a prisoners dilemma game. In the Prisoners dilemma, 2 prisoners are being interrogated. The best combined result is if both prisoners keep silent. However, if you are the only one to confess, you will do even better. The worst overall result is if both confess. There is a major incentive to confess, since you maximize your own result regardless of what the other prisoner does.
An analogy in business could be a pricing decision. If you and your competitor both price high, you will both make reasonable profit. If you price low and they price high, you will make a killing. However if you both price low, neither of you make any profit.
In business, a new dynamic comes into play since most games are repeated. This creates the opportunity to train and discipline your competitor over time. For instance, one of the best strategies for a repeated prisoner’s dilemma game is “Tit-for-Tat”. This immediately punishes a competitor that cheats, but as quickly forgives if it returns.
Developing a consistent “Tit-for-Tat” strategy is part of building your overall competitive reputation.
When is it useful?
Use when you have to think through how other parties will respond to your moves
How do you do the analysis?
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How can you adapt this concept?