In the 1980s, American Airlines and Braniff locked into a price war so destructive it helped drive Braniff into bankruptcy — and left American barely standing. Neither side wanted that outcome. Both chose it anyway. That paradox is exactly what game theory was built to explain. Game theory is a powerful tool for anticipating competitor moves and responses, developed rigorously by John Nash and others to understand strategic decision-making in competitive environments. Last lecture established that strategy lives in the fit between activities — the architecture of your value chain. But that architecture doesn't exist in a vacuum. It exists in a competitive landscape where every move you make triggers a response. Game theory helps you anticipate competitor moves: your optimal strategy depends on predicting others' actions and responses. This isn't abstract, Fabio. It's the operating reality of every market. Game theory gives you tools to navigate it. The simplest is the payoff matrix — a normal-form representation showing every player's outcomes across every combination of strategies. From that matrix, you can identify a dominant strategy: one that delivers a higher payoff than any alternative, regardless of what rivals do. When all players have dominant strategies, you reach a dominant strategy equilibrium. But here's where it gets uncomfortable. The Prisoner's Dilemma illustrates how anticipating competitor responses can prevent collectively catastrophic outcomes. Two competitors, each choosing independently, both defect — because defection is individually rational. The result is a Nash equilibrium: a strategy profile where no player benefits by unilaterally changing course. Stable, yes. Optimal, no. Nash equilibrium is a trap that looks like logic. It's why price wars erupt even when every executive in the room knows they'll destroy margin for everyone involved. The escape route is time. Single-move thinking is what produces the dilemma. Multi-round games change the calculus entirely. When players interact repeatedly, a strategy called Tit-for-Tat becomes powerful: cooperate first, then mirror your opponent's previous move exactly. It rewards cooperation, punishes defection, and signals credibility without aggression. Backwards induction — solving a sequential game from the end backward — reveals something equally important: in entry games, an incumbent's rational move is often accommodation, not a price war, because the war costs more than sharing the market. The seemingly suboptimal short-term move is frequently the strategically superior one once you account for the full sequence. So how do you actually use this, Fabio? You build what game theorists call a complete contingent plan — a strategy that specifies your action for every possible situation you might face, not just the one you expect. You use iterative deletion of strictly dominated strategies: eliminate every option that is unambiguously worse than an alternative, across all possible rival moves, until only viable strategies remain. What's left is your decision space. Then you stress-test it against rivals' best responses, not their stated intentions. This is where strategic thinking separates from tactical thinking. Tactics ask: what's my next move? Strategy asks: given every move available to every player, what sequence of moves creates a position I can defend? The rules of the game — timing, available actions, information each player holds — determine which moves are even possible. Ignore those rules and you're not playing strategy. You're playing wishful thinking. Using game theory to anticipate competitor reactions is crucial. It distinguishes a strategic move that builds advantage from one that triggers a counterproductive response. A price cut that looks profitable in isolation can ignite a war that destroys the entire industry's economics. A market entry that seems bold can be met with accommodation — or annihilation — depending on the incumbent's cost structure and time horizon. The core discipline of game theory applied to strategy is this: never evaluate a move by its immediate payoff alone. Evaluate it by the full chain of responses it sets in motion. A move today that looks suboptimal can be the one that wins the game tomorrow.