Math Meets B2B SaaS: To compete or to collaborate – The Prisoner’s Dilemma

Should B2B SaaS peers compete or collaborate?  

Time and again, major B2B SaaS players have opted for cooperation over cutthroat rivalry in areas ranging from pricing to product development to go-to-market strategies. For example, AWS, Microsoft Azure and Google Cloud have chosen to offer highly detailed, publicly available pricing calculators and documentation, which helped set an industry standard through full transparency. Similarly, while HubSpot and MailChimp offer overlapping marketing automation tools, they chose to integrate their platforms, enabling seamless data synchronisation and providing marketers with a unified view of their campaigns.  Microsoft 365 Copilot is an AI-powered tool that assists users across Microsoft applications with drafting documents, summarising content, and facilitating collaborative content creation. Rather than competing directly with specialised legal AI solutions, Microsoft has opted to provide access to third-party tools such as Harvey AI, Definely, Evisort, and Draftwise within its ecosystem.  

This leads one to think – why do these companies, despite being competitors, choose to collaborate? The answer lies in game theory, specifically, the Prisoner’s Dilemma. 

Which brings us to the next edition of “Math Meets B2B SaaS”, where we’ll explore Prisoner’s Dilemma, a foundational concept in game theory that demonstrates how individual rational strategies can lead to suboptimal outcomes, and why “co-opetition”, the blend of cooperation and competition, can drive better outcomes for everyone. 

Let’s start with the basics: What is Prisoner’s Dilemma?

The Prisoner’s Dilemma is a classic concept in game theory that illustrates how two rational individuals might not cooperate, even when it’s in their best interest to do so. Here is how it goes: 

Scenario

Two criminals are arrested and interrogated separately. Each has two options:

1. Cooperate (Stay Silent)
2. Defect (Betray the other)
   

• If both were to cooperate, they’d only serve 1 year each.
• If one betrays, the other stays silent, the betrayer goes free, while the silent one gets 3 years.
• If both betray, they each get 2 years. 

The payoff matrix looks like this:

In the Prisoner’s Dilemma, since prisoners can’t communicate or trust the other, each has an incentive to betray to minimise their own sentence. The dominant strategy – rational self-interest – leads both to defect, resulting in a worse outcome (-2, -2) than if they had cooperated (-1,-1). But luckily, life isn’t a one-shot game. As players, we face our counterparts multiple times over extended periods, and find ourselves in an Iterated Prisoner’s Dilemma. 

Whether in business, diplomacy or climate negotiations, this repetition introduces long-term consequences, shifting the optimal strategy away from short-term self-interest (defection) and towards collaboration (cooperation). One of the most effective strategies in iterated Prisoner’s Dilemma is Tit-for-Tat – that suggests, start by cooperating, then mirror the opponent’s previous move. If they defect, you defect next time; if they cooperate, you do the same. This strategy builds trust and stability over time, deterring betrayal.

How’s this relevant to B2B SaaS?

I believe that by now (i.e., the 8th edition of Math meets B2B SaaS) we’ve established that maths are not just theories. Like the laws of physics, mathematical principles shape everyday life – even when they go seemingly unnoticed. And the prisoner’s dilemma isn’t just a theoretical game; it plays out in real business decisions daily, from pricing wars to product integrations to talent acquisition strategies. 

Example: Pricing Strategy

Consider pricing as an example. You face a strategic choice: lower your prices to capture more market share or maintain them to preserve margins. If competitors respond by cutting their prices too, the result is a price war that erodes profits across the industry. However, if they hold their prices steady while you lower yours, you gain a larger customer base.  So the Prisoner’s Dilemma Scenario becomes:

Each company has two choices:

• Cooperate (Maintain prices)
• Defect (Lower prices) 

with the following possible outcomes:

• If both maintain prices, they keep high margins and share the market equally (moderate profit).
• If one lowers prices while the other maintains, the price-cutter gains market share, increasing its customer base but at a lower margin, while the other company loses market share.
• If both lower prices, they engage in a price war, reducing profit margins for both.

And the following (rather illustrative) payoff matrix:

The dominant strategy in the ‘one-shot’ version of this game would be to lower prices, i.e., rational self-interest. However, everyday business life is an iterated version of this game, where ‘Tit for Tat’ – the approach of starting with cooperation and then mirroring the opponent’s previous move (cooperating if they cooperate, defecting if they defect) – is an effective strategy. 

Going back to the example of AWS, Microsoft Azure and Google Cloud, we can argue that they maintain competitive yet stable pricing structures through transparency – a rather collaborative approach. However, if one provider were to aggressively undercut the others, it could trigger a retaliatory cycle, leading to lower profits for all. This balance of competition and collaboration demonstrates how ‘Tit-for-Tat’ plays out in real-world SaaS pricing strategies, encouraging sustainable growth rather than short-term gains.

Example: Product Development

Let’s look at product development as another example and go back to the HubSpot and Mailchimp example. Let’s frame this as a Prisoner’s Dilemma scenario.

Each company has two choices:

• Cooperate (Integrate their platforms)
• Defect (Develop in isolation)

With the following possible outcomes:

• If both integrate, they create a smooth user experience, boosting adoption for both (mutual win).
• If one integrates while the other doesn’t, the integrator provides value but risks depending on a non-reciprocating partner.
• If neither integrates, users struggle with disconnected workflows, increasing frustration and churn.

Here’s a simplified payoff matrix:

While short-term self-interest might tempt companies to go solo and build walled gardens, the iterated nature of business makes cooperation a smarter play. That’s why HubSpot and Mailchimp chose to integrate their products despite their overlapping capabilities in marketing automation —because in the long run, collaboration leads to stickier products, happier users, and stronger market positioning.

Conclusion 

The Prisoner’s Dilemma reminds us that short-term self-interest may not lead to the best outcomes for anyone. It shows that a rigid competitive stance may limit long-term scalability. However, we also know that an overly collaborative approach may erode differentiation. The key is knowing when to compete and when to cooperate. The Prisoner’s Dilemma is a helpful framework to assess other players’ incentives, positioning and potential payoffs in the short and long term. It might guide us towards more collaborative or more competitive strategies based on factors such as: 

This dilemma, like many others, is not easy to navigate. However, mathematical theories like game theory help us get into the right perspective and ask the right questions. And, the first question Prisoner’s Dilemma always poses is: are you playing a one-shot game, or are you thinking long-term?