You run a business in a market a rival might enter. You can spend money now to build a costly, binding commitment (like extra factory capacity) that makes a future price war believable — or save the money and hope for the best. Then watch how your rival reacts.
You move first, choosing whether to commit. Your rival sees your choice, then decides whether to enter the market. A believable commitment can change your rival's decision even before they move.
Without commitment, threatening to fight is an empty threat — fighting hurts you too, so your rival ignores it. Paying an upfront cost to remove your own flexibility can paradoxically make you better off, because it makes your threat believable.
This game explores one of the most counterintuitive ideas in game theory: sometimes limiting your own options makes you stronger, not weaker. In the entry-deterrence game above, an established business (you) wants to keep a rival out of its market. Simply threatening "if you enter, I'll cut prices and fight you" isn't automatically believable — because once the rival actually enters, fighting would hurt you too, so a rational rival predicts you won't really follow through. That's an empty threat, and it fails to change behavior.
A credible commitment changes the story. By spending money upfront on something like extra factory capacity, a nonrefundable advertising campaign, or a public contract, you remove your own ability to back down later. Now, if the rival enters, fighting back genuinely is your best option — not something you'd rather avoid — because you've already sunk the cost that makes the fight cheap or unavoidable for you. Since the rival can see this commitment in advance, they update their expectations and often decide it's not worth entering at all. Economist Thomas Schelling described this idea as the "paradox of power": deliberately narrowing your own choices can increase your bargaining power, because it makes your promises and threats trustworthy in the eyes of others.
This is why game theorists analyze these situations using "backward induction" — working out what the second mover will rationally do at each possible first move, then figuring out which first move leads to the best outcome once you account for that reaction. The lesson isn't that commitment is always worth its cost. Sometimes the upfront price of commitment is too high, and staying flexible is smarter. But understanding that a rival will react differently to a credible threat than to an empty one is a crucial skill in business, negotiation, and everyday life.
With a friend or sibling, play a simple negotiation: you both want the last slice of cake, but whoever "commits first" out loud (for example, by taking a bite in front of the other person) gets to keep it, while the other person can still choose to "fight" (both go hungry) or back down. Play a few rounds where one of you commits first and a few where neither of you does, and talk about how the outcome changes depending on whether the commitment feels real or fake.
What is a credible threat in game theory?
A credible threat is a promised action the other player believes you will actually carry out, often because you've made it costly or impossible to back out of.
What is entry deterrence?
Entry deterrence is when an established company acts to discourage a new rival from entering its market, often by signaling it will fight hard if the rival enters.
Why does commitment matter if it's costly?
Paying an upfront cost to remove your own future options can make your threats believable, which changes how your rival behaves — sometimes making you better off overall.
What is an empty threat?
An empty threat is one the other player doesn't believe you'll follow through on because it wouldn't be in your interest to carry it out, so it fails to change their behavior.