From early play to daily habits, games are key to learning and growth. Through applying strategies and studies such as game theory to the business world, we can also make use of games in our professional lives.
Game theory helps negotiators think strategically. It brings logic and structure to decision-making, especially when outcomes depend on how others behave. When used well, game theory helps map options, predict reactions, and manage risk.
Here, we'll unfold the instruction manual of game theory, set out the pieces, and explain the rules. By applying it to your negotiation strategy, you'll discover how to understand your opponent, enhance your decision-making, and gain more control at the table. Whether negotiating for a raise or trying to secure a high-stakes business deal, a little gamification can go a long way.
Game theory is a field of study that uses mathematical models to analyze and explain how people choose between conflict and cooperation. Fortunately, you don't need to be a mathematician to benefit from it. Toddlers, despite minimal negotiation experience, win the battle of broccoli every day.
In game theory, interactions between decision-makers are represented as competitive scenarios, which consist of players, strategies, and payoffs. The aim for each player is to make decisions that maximize their own interests while factoring in how others might respond.
At its core, negotiation is a strategic interaction involving multiple parties with conflicting needs and interests. Game theory provides a structured approach to understanding negotiation dynamics and predicting possible outcomes.
While there are many "games" in game theory, five are particularly relevant to negotiations:
When mistrust could lead both sides to lose, even though cooperation would win.
Prisoner's Dilemma is a tricky situation where the negotiation outcome rests on the combination of decisions made by two parties. A typical scenario unfolds like this:
Two criminals are taken in by the police for questioning. Each one is individually presented with the same deal. If A informs on B without B informing on them, A will get away with it, while B will get three years in jail. If A stays silent while B informs on them, B will get off scot-free while A gets three years. In the case where A and B inform on each other, both parties will receive a sentence of two years. If neither A nor B chooses to inform, then they will each get 1 year.
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B |
B |
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Stay Silent |
Inform |
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A |
Stay Silent |
1 - 1 |
3 - 0 |
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A |
Inform |
0 - 3 |
2 - 2 |
In the prisoner's dilemma, it is assumed that neither party is aware of the other's decision, and that the game is played out as a once-off instance.
Though cooperation would yield the best outcome for all, self-interest and mistrust usually push them to betray each other, leaving both worse off.
Two suppliers are competing to become a retailer's sole distributor. If both submit balanced offers, the retailer may split the business. If one undercuts, they may win it outright. But if both undercut, prices collapse and neither makes the deal worth having.
Avoid a race to the bottom by shifting focus from price to value. Differentiate through service or performance guarantees. This way, you can protect the margin while meeting the retailer's needs.
One side sets fixed terms—take it or walk away.
In the ultimatum game, one party makes a fixed offer and refuses to negotiate. The other party can accept or reject; no pricing counteroffer is allowed. If they reject, both sides walk away with nothing. If they accept, they will gain the deal, but potentially with unfavorable consequences.
The supplier faces a choice: accept a low-margin deal or lose business entirely. Agreeing may secure short-term revenue but could signal weakness, encourage future ultimatums, and damage the long-term business relationship.
Scotwork was faced with the demand of a 25% reduction in course fees by a prospective client. This posed a challenge, given Scotwork's longstanding policy that the course fee is set.
Find creative ways to give the client what they want, but in the way that you want it.
At that time, it cost $40k for a company course, and $4k per place on open courses.
Scotwork's response was to say that if the prospective client bought a company course ($40k), we would allow them to sell six places to suppliers at the open course fee of $4k per head ($24k). This represented the discount requested by the client. At the same time, Scotwork maintained its set course fee and got introduced to six potential new customers.
One side risks first, hoping the other will return the favor.
In the game of Trust, each party is given an amount of money by the "examiner." Player A has a choice of whether to keep their money, which causes the game to end; each party walks away with the same amount they were given. Or Player A can choose to give an amount of money to Player B, which the examiner will triple. Player B can then decide whether to walk away with the full amount or continue the game by splitting the money between themselves and Player A.
If A trusts B, it is in their best interest to send money to B. They hope that doing this will influence the distribution of the reward, resulting in higher returns and a mutually beneficial relationship.
In negotiation terms, the Trust scenario highlights the effectiveness of choosing a collaborative strategy for mutually beneficial solutions.
A software vendor allows a client early access to premium features during the trial period, hoping it will secure a long-term license deal. If the client acts in good faith and moves forward with a contract, trust pays off. If they walk away after the trial, the vendor loses leverage and revenue.
Rather than making a large upfront concession, begin with a small cooperative gesture. Watch how the other party responds, and base future decision-making on the information you receive.
Bigger wins need joint commitment; without it, both receive a smaller win.
The Stag Hunt scenario emphasizes the conflict between cooperation and competition. It presents two hunters who must decide whether to hunt a stag together (higher reward) or a hare independently (lower reward). Hunting a hare will be easier, whereas they will need the cooperation of the other party to hunt a stag. Both parties will receive more favorable outcomes if they work together.
This scenario mirrors negotiations where parties must decide whether to pursue ambitious joint gains or opt for safer individual gains. Game theory for Stag Hunt highlights the importance of aligning goals and incentives for mutually beneficial outcomes in negotiation discussions.
Two firms consider forming a joint venture to bid on a large government contract. By combining expertise, they stand a strong chance of winning the deal (the stag). However, the process is complex, requires shared risk, and depends on full cooperation.
Alternatively, each could bid alone for smaller contracts (the hare)—lower reward, less risk, no dependency.
The Stag Hunt reminds negotiators that bigger gains often require shared ambition, aligned goals, and trust that the other side will follow through. If either side doubts the other's commitment, they may default to safer, smaller wins.
Reduce uncertainty through upfront communication and clear commitments. Formalize expectations in a joint bidding agreement that sets roles, responsibilities, and shared rewards. Include exit terms in case one party backs out. This builds confidence, limits risk, and increases the chance of securing a bigger deal.
Both sides threaten to escalate, but if neither backs down, everyone crashes.
The origin of "Chicken" is a dangerous car racing game in which two drivers drive straight towards each other. The one that swerves first loses and is mocked as the "chicken," while the other party is pronounced the winner. If neither swerves, neither is the "chicken"...but they crash.
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Player A |
Player A |
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Swerve |
Maintain speed |
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Player B |
Swerve |
No crash, Draw |
No crash, Player A wins |
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Player B |
Maintain speed |
No crash, Player B wins |
Crash, Draw |
Chicken is a common game seen in negotiations and is often used by inexperienced negotiators. It is not a collaborative approach to negotiation, as it creates a confrontational atmosphere and often results in one party winning over the other.
This game theory encourages negotiators to assess the credibility of the other party's commitments and identify the potential consequences of pushing the situation to the brink.
Two software firms claim rights to a key algorithm. Each threatens legal action. Both know that going to court will be expensive and slow, but neither has the humility to back down.
Both sides could agree to a joint licensing deal. It protects their positions, avoids litigation, and turns a legal risk into shared revenue.
If one party won't agree, the other side could reframe the offer to appeal to the first party's self-interest, without requiring them to admit defeat.
E.g., "We propose a neutral third party assess licensing rights. If there's overlap, we split it. If not, we walk. That way, neither of us wastes time in court."
The use of game theory can bring a host of benefits to any negotiation scenario. These include:
The negotiation process can be emotionally charged, which may lead to irrational decision-making. Game theory helps mitigate impulsive behavior by encouraging negotiators to consider the potential outcomes associated with various strategies.
Game theory highlights the potential for win-win solutions, where all parties involved can maximize joint gains. This approach helps negotiators identify cooperative strategies to boost the likelihood of reaching mutually beneficial agreements.
Game theory provides a systematic framework for analyzing dynamics and outcomes in negotiations. This helps negotiators anticipate possible moves and counter-moves by various parties, allowing them to develop effective strategies that align with their goals.
Applying game theory principles in negotiation scenarios offers a structured and strategic approach to navigating complex interactions. By understanding classic game theory scenarios like the Prisoner's Dilemma, Ultimatum, Trust, Stag Hunt, and Chicken, negotiators can enhance the quality of discussions and secure win-win outcomes for all parties involved.
To learn how to conduct successful negotiations (without the guesswork), speak to a Scotwork consultant. We can assist with negotiation training, one-to-one coaching, and tailored solutions for your business.
Get in touch today and transform the way you think about business negotiations.
