Are You Competing Like It's Chess When It's Actually Poker?

Are you competing like it’s chess when it’s actually poker?

I ask because the answer probably explains your last strategic surprise. When a rival cuts prices, launches into your segment or makes a move that seems personally insulting, you default to a story about their irrationality. “They’re leaving money on the table,” you tell the board. “They don’t understand their own costs.” Then the next quarter arrives and they’re still doing it.

Here’s the kicker, though. That foe may not be irrational at all. You might simply be playing the wrong game.

Most leadership teams behave as if strategy were chess. The board is visible. Every piece sits in plain sight, every rule is public and the better calculator wins. Then the annual planning cycle begins: you map your position, project competitor behavior, and run scenarios two or three moves deep. The whole exercise assumes your competitor sees what you see.

They don’t.

Business has more in common with a late-night poker table. You see a fraction of the cards. Rivals bluff without penalty. Information is expensive, deliberately distorted and rarely symmetrical. And because no one at the table announces their hand, your winning plan depends on what you think the other players believe, not just on what is actually true.

Take that seriously and the quality of your strategy improves overnight.

The Hypothesis: Your Competitors Are Playing Poker

Let me state the hypothesis plainly. Competitive advantage in most markets is not a calculation problem. It is an interdependence problem.

What that means: the value of any move you make depends on how rivals respond. Price cuts work if opponents tolerate them. They backfire if opponents retaliate. A brilliant product launch fails when a competitor, anticipating it, pre-announces something similar. Your strategy is only as good as the reaction it triggers, and you cannot know that reaction in advance because you cannot read their minds. You can only predict, signal and shape.

Here is where classic planning fails. Most strategy frameworks treat markets as if companies optimise independently. You pick a position with strong barriers, your analysis assumes rivals are scenery. They are not scenery. They are players making choices in response to your choices, while you respond to theirs. That loop is the essence of what game theorists have studied for decades in business.

Yet the discipline remains oddly underused. Game theory carries an academic reputation, dense math and bizarre names like “the trembling hand equilibrium”. Executives conclude it is either too abstract or too sinister for real-world decisions.

That’s a mistake. Because game theory supplies the one thing ordinary strategy never gives you: a structured way to reason about how other rational actors will behave before they do.

A Useful Historical Footnote

For the record, game theory wasn’t invented by economists in business schools. It was born in mathematics and cold war strategy.

When John von Neumann and Oskar Morgenstern published Theory of Games and Economic Behavior in 1944, they were trying to model human decision-making in situations where outcomes depend on the choices of multiple parties. The work was deeply abstract, and it sat in university libraries for two decades before strategists borrowed it. By then, the great mathematician John Nash had contributed something even more important: his equilibrium concept, introduced in 1950 while he was still a graduate student at Princeton.

You have heard the term “Nash equilibrium” thrown around in boardrooms. Most people think it means some fair or stable outcome. It does not.

A Nash equilibrium exists when every player is doing the best they can, given what every other player is doing. Nobody can improve their position unilaterally. The uncomfortable insight is that such an equilibrium can be awful for everyone. Competitors can be locked forever in mutually destructive behavior, and no single actor can escape on their own. It is entirely rational to keep making terrible choices when the alternative — cooperating — leaves you exposed.

This is not a theoretical curiosity. It is the single most useful lens for understanding why industries get stuck.

The Prisoner’s Dilemma Is the Default Business Game

If you have sat in a pricing meeting, you already know the prisoner’s dilemma. You’ve just never called it that.

Imagine two major airlines on the same route. They can both hold fares high and enjoy comfortable margins. Or one can quietly lower prices and steal market share from the other. If they both lower prices, margins collapse and both suffer. The game’s logic is brutal: each airline fears being the sucker who holds prices while the other undercuts. So both discount, and the industry settles into a low-profit equilibrium from which neither dares to move. This is why a single aggressive entrant destroys pricing discipline in an entire market. It only takes one player to tip everyone into the trap.

The prisoner’s dilemma is the default structure of most business competition. Price wars, subsidy wars, bidding wars and promotional arms races all follow the pattern. Rivals maintain strategies that are collectively ruinous, because cooperation is fragile and betrayal pays immediately.

For a strategist this raises an urgent question: how do you get out?

Game theory offers an uncomfortable answer. In a one-shot prisoner’s dilemma, you cannot. The rational move is always to defect. Escape requires changing the rules — making the game repeatable, improving communication or restructuring payoffs so that cooperation becomes more valuable than betrayal. That insight transforms your job. You are not merely picking a winning position within fixed rules. You are in the business of changing the rules.

Adam M. Brandenburger and Barry J. Nalebuff made exactly this argument in a landmark piece for Harvard Business Review, the right game back in 1995. Their central claim still holds: too many executives play the game they are given when their real task is to shape the game they are in.

Riding the Uber and Lyft Subsidy Spiral

Here’s a real-world example that plays out almost exactly as game theory predicts. For years, ride-hailing giants Uber and Lyft bled billions of dollars in a ferocious subsidy war.

The logic was textbook. To win riders, each company discounted fares. To win drivers, each raised incentives and guarantees. When Uber lowered prices, riders drifted toward it. Lyft responded with its own cuts. For a neutral observer it looked like competitive insanity, the prisoner’s dilemma in its rawest and most expensive form.

Think about each firm’s position. If Uber stopped subsidising while Lyft continued, Uber would lose market share and investor confidence. If Lyft blinked first, Uber would feast. Neither company trusted the other to cooperate, so both kept throwing money at growth, locked in an equilibrium where every extra dollar of revenue cost far more in subsidies. The result was rational and ruinous at the same time.

The way out came through a signal change.

In early 2022, Uber’s leadership publicly said it would stop chasing unprofitable trips and would focus on share repurchases and returns rather than growth at any cost. Lyft matched the shift under new management. Both companies pulled back from the incentive war, margins improved and by 2023 the industry was closer to sane economics than it had been in years.

Notably, neither firm needed a handshake or a merger to cooperate. They read each other’s signals and expectations shifted. This is the real lesson: in repeated competitive games, you communicate through deeds, not just words. And sometimes the boldest strategic move is strategically refusing to keep playing the ruinous game.

If You Cannot See Their Cards, Read Their Signals

Let’s be honest. In poker, bluffing works because players conceal information. Companies do the same thing. Their costs are opaque. Their capacity plans are hidden. Their true commitment to a market is clouded by press releases and conference calls, all of which are what game theorists call cheap talk: communication that costs nothing and therefore proves nothing.

The second your competitor tells you they will “invest aggressively for the long term”, they might be telling the truth, or they might want you to believe it so you stay out. Watch what they spend money on, not what they say. Actions are costly, and costly actions carry information.

This is the concept of signalling, and it runs straight through competitive strategy. A firm that builds a massive new plant is not communicating “we believe in the future of this market.” They are communicating something harder: “we have the capacity to drown you in product at prices you cannot match.” Whether they will actually do it matters less than whether you believe they might.

So understand whether the signals you send are credible. Cheap talk rarely moves markets. But a genuine commitment — one that visibly raises the cost of backing down — can reshape rival expectations entirely.

The Power of Making Threats Credible

Strategists love to talk about winning. Yet some of the most powerful competitive moves look suspiciously like losing.

Consider the logic of the credible threat. If you tell a deep-pocketed competitor that you will fight any entry into your home market, they may ignore you. Everyone threatens to fight. But if you make the threat credible — by locking yourself into actions that would harm you if you did not follow through — they take you seriously.

A classic example already mentioned: the burning of the boats. When a commander burns the ships upon arrival, soldiers understand there is no retreat; they will fight harder, and observers know this too. In business terms, you can make commitments that bind you to aggressive retaliation, and those commitments are valuable precisely because they remove your freedom.

The other side of this coin is less discussed. Avoid credibility. If you want rivals to stay aggressive in a market you’ve abandoned, you can signal weakness. This sounds counterintuitive, but consider how helpful it is to be perceived as a narrow player who will not retaliate outside a particular segment. Your credibility is a limited resource; spend it strategically.

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