well, it's not so black and white as only competing on cost or price. it's true that your competitive advantage has to come from lower costs (via operations, ma

well, it's not so black and white as only competing on cost or price. it's true that your competitive advantage has to come from lower costs (via operations, marketing, finance, or whatnot), so you do compete with other market participants on cost. but you also compete on price in the marketplace--not so much as to ignore your costs, as you note, since negative margins generally don't lead to viable businesses, but price competition nonetheless. your example is the simplest game-theoretic version of price competition, which is more of a teaching model than a practical application. (dynamic) price discrimination and other marketing tactics are typically employed to ensure positive margins even as you compete on price in the marketplace (e.g., airline seats).