Game Theory in Business: Strategies for a Competitive Edge
| 6 Min Read
If you think about it, business and games have a lot in common. Both involve competitors, require smart strategies and conclude with outcomes where people win or lose.
So, it makes sense that applying game theory in business can provide a leg up when seeking a competitive advantage in the marketplace. It’s also a core reason professionals pursue Eastern Oregon University’s online Master of Business Administration (MBA) program, which is designed around the strategic thinking modern business demands.
What Is Game Theory?
Game theory is the formal study of how decisions made by multiple participants shape outcomes. It provides businesses with a structured framework for anticipating competitors’ moves and selecting strategies that lead to better results. With roots in applied mathematics, game theory examines the connections between participants in an activity and how their decisions affect the outcome. According to Britannica, games can be classified across five key dimensions:
Cooperative vs. non-cooperative games: In cooperative games, players can communicate and make binding agreements to work toward a shared outcome. In non-cooperative games, no such enforceable agreements exist and participants compete independently.
Perfect vs. imperfect information games: In perfect-information games such as chess, each player knows everything about the game at all times. In imperfect-information games such as poker, players must act without knowing all of their opponents’ details.
Simultaneous vs. sequential games: In simultaneous games, players must decide without knowing what others will do. In sequential games, players take turns, with each decision informed by prior moves.
Symmetric vs. asymmetric games: In symmetric games, all participants use the same strategies, and the outcome would remain the same if players reversed roles. Asymmetric games allow different tactics for each side, where one participant’s advantage may come at another’s expense.
Zero-sum vs. non-zero-sum games: In zero-sum — or constant-sum — games, one player’s gain is precisely another’s loss, creating pure competition. In non-zero-sum games, all parties can benefit, making outcomes less adversarial.
These classifications apply to games like poker (zero-sum, imperfect information) and chess (sequential, perfect information). They also apply to real-world scenarios with much higher stakes, including military conflicts, politics and economics.
How Does Game Theory Apply to Economics and Business?
Game theory gives economists and business leaders a shared framework for understanding how organizations make decisions that affect production, pricing and competition. According to research published by IntechOpen, game theory is one of the most widely applied tools across economics, finance, management and business strategy. Here are three key examples:
Price Wars
When prices are stable, companies profit from their goods and services. Price wars begin when one organization cuts prices to an unsustainable level, forcing competitors to follow suit or lose customers. According to McKinsey & Company, a 1% price increase at an average S&P 500 company can generate an 8% rise in operating profits — meaning the reverse is equally true when prices fall.
Companies that start price wars may be chasing a dominant strategy. Corporate Finance Institute defines the dominant strategy as “a situation where one player has superior tactics regardless of how their opponent may play.” If only one company can sustain a price war, its competitors must find an alternate strategy to stay in the game.
Trade Wars
Countries engage in trade disputes by imposing tariffs that raise the price of goods. When rivals choose terms that benefit only themselves and refuse to yield, they enter a state known as the Nash equilibrium. Named after mathematician John Forbes Nash, Investopedia describes the Nash equilibrium as a concept in non-cooperative game theory in which “players know their opponent’s strategy and still will not deviate from their initial chosen strategies because it remains the optimal strategy for each player.”
What Is the Prisoner’s Dilemma in Business
The prisoner’s dilemma is a game theory scenario in which two parties, each acting in self-interest, choose outcomes that are worse for both than if they had cooperated. According yto Investopedia, the the prisoner’s dilemma shows why two rational actors may not cooperate even when cooperation would benefit them both.
In business, this plays out when competing firms both invest heavily in advertising, raising costs for both without gaining a real advantage. It also surfaces in pricing standoffs, supply chain negotiations and licensing disputes. Recognizing the prisoner’s dilemma helps leaders identify when cooperation produces better results than direct competition.
How Does Game Theory Support Strategic Decision Making?
Strategic decision-making is one of the most direct applications of game theory in business. Game trees map every decision a company and its competitors might make, then visualize the likely outcomes of each path. The complexity of business can feel overwhelming, and game theory helps leaders build structure around uncertainty. Key applications include:
Market analysis: A financial services firm can use game theory to anticipate how companies and consumers respond to various market conditions.
Competitor analysis: After developing tactics, a business can game out potential responses from competitors to determine the best path forward.
Negotiations: Closing a deal requires analyzing the concessions another party might make while finding ways to secure an advantageous offer.
Business leaders using game theory for strategic decision making now have a powerful new tool — artificial intelligence. Research published on SSRN examines how machine learning and AI work in synergy with game theory for complex decision-making, using reinforcement learning and deep learning to improve forecasting and strategic planning.
Real-World Applications of Game Theory in Business
Practical uses of game theory appear across the business landscape. Learnsignal shared three examples that show how companies use game theory to gain a competitive edge:
Smarter Strategies in the Smartphone Market
In June 2024, Samsung and Apple were the top smartphone manufacturers in the world, according to Statista. To gain an advantage, each could apply game theory to gauge how consumers — and one another — might respond to pricing changes, interface updates and product revisions.
Amazon’s Grip on Online Retail
Amazon held 37.6% of the online retail market in 2023, about six times more than its closest competitor, according to Statista. Applying game theory to cut into that lead would require retailers to leverage their unique strengths while knowing Amazon can respond with dominant strategies, including pricing tactics that many competitors cannot sustain.
A Bigger Share of the Ride-Share Market
CNN reported that Uber controlled 74% of the ride-share market in 2023, outpacing Lyft. As Lyft plays catch-up, it could use game theory when analyzing how to differentiate itself.
Uber’s investment in autonomous vehicles, highlighted by TechCrunch, underscores its expanding partnerships in the field. Should Lyft follow Uber down that road? The application of game theory in business could help determine the best strategic move.
Ready to Win in Your Business Career?
Building advanced skills for improving organizational decision-making is vital as the business world becomes more complex. Go beyond theory by developing the practical competencies leaders need today in the online Master of Business Administration program from Eastern Oregon University.
Experienced faculty prepare you to harness proven techniques for improving organizational decision-making, marketing products and generating results in our global economy. Designed for working professionals looking to gain skills and credentials on a flexible schedule, this 100% online program features pay-by-the-course tuition and multiple start dates per year.
Learn more about Eastern Oregon University’s online MBA program.