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Sizing Up Competitive Situations 399

services, advertising, and so on. In broadest terms, an airline strategy

would encompass marketing decisions (advertising, the use of

computerized reservation systems, and frequent-flier programs),

investment decisions (ordering planes, expanding terminals, and

choosing hubs), manpower and labor decisions, and merger and

acquisition strategies.

2.Outcomes and Payoffs. The firm’s action, together with actions taken

by its rivals, determines the outcome of the competition. In the battle

for air passengers, the three airlines’ numbers of departures

completely determine their market shares (and the number of tickets

they sell). Associated with any outcome is a payoff that embodies each

competitor’s ultimate objective or goal. For a private firm, such as an

airline, this payoff usually is measured in terms of monetary profit. In

other situations, payoffs take nonmonetary forms. In a war, payoffs

might be expressed in terms of territory taken, number of enemy

killed, and so on. In the race for the U.S. presidency, payoffs might be

counted in electoral college votes. In short, a payoff summarizes and

measures the preferences of a given player.

3.Underlying “Rules.” Just as important as the players, actions,

outcomes, and payoffs are the formal and informal rules that govern

the behavior of the competitors. One category of rules includes

generally agreed-upon competitive practices, laws, and specific

industry regulations. For instance, before 1978, the airline industry

operated under strict government regulations. In the current era of

deregulation, price and entry constraints have been dropped.

Nonetheless, myriad antitrust rules and regulations prohibit price

collusion, unfair practices, and mergers that would increase

monopoly power. A second category of “rules” provides a framework

to model the competition. They specify whether competitors take

actions simultaneously or sequentially. If sequentially, who moves first,

second, or last? These rules also describe what each competitor knows

about the others’ preferences and previous moves at the time it takes

action. In the battle for air passengers, airlines set their number of

departures independently and without knowing their competitors’

decisions.

Equally important, competitive situations differacross a number of dimensions.

1.Number of Competitors. The number of competitors is one

fundamental way to categorize competitive situations. We distinguish

between settings with two competitors (so-called two-person games)

and those with more than two (n-person or many-person games). In a

two-person game, you and your adversary have conflicting interests to

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