Does Strategy Research Need Game Theory?

Abstract

Game theory has not been applied much to business strategy. I review some criticism of the game-theoretic approach which inhibits its application, and mention some others. The common criticism that game-theoretic models assume too much rationality is often wrong because (i) some games require little rationality to compute equilibria; and (ii) players may reach an equilibrium by communicating, adapting, or evolving to it rather than by calculating it. However, other criticisms can be forceful: Game theory is hard to use and test, it threatens to explain anything, it generates customized models of local settings rather than general regularities, and it offers only part of the advice a manager needs. Nonetheless, game theory could be a fruitful source of ideas and testable implications for strategy, requiring more fine-grained, longitudinal studies sensitive to interactions between structural variables.