Chapter 15

Game theory: the prisoner’s dilemma

Firms don’t always think directly about what is right for their customers; sometimes they also think strategically about how their competitors will behave, and adapt their own behaviour accordingly. Game theory provides a set of models, such as ‘the prisoner’s dilemma’, which helps a firm plan its strategy, taking all such factors into account.

When to use it

  • To select a course of action in a highly competitive situation.
  • To understand the likely moves of your competitors.
  • To help you in negotiations.


Game theory has deep academic roots. It emerged from the field of mathematics, and its invention is typically attributed to John von Neumann who wrote an initial paper on the subject ...

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