The chain store paradox is an apparent game theory paradox describing the decisions a chain store might make, where a "deterrence strategy" appears optimal instead of the backward induction strategy of standard game theory reasoning.
Player A, in response to a choice of in, must choose one of two pricing strategies, cooperative or aggressive.
The "deterrence strategy" is not a Subgame perfect equilibrium: It relies on the non-credible threat of responding to in with aggressive.
Selten argues that individuals can make decisions of three levels: Routine, Imagination, and Reasoning.
The individuals use their past experience of the results of decisions to guide their response to choices in the present.
(Selten) The individual tries to visualize how the selection of different alternatives may influence the probable course of future events.
The individual makes a conscious effort to analyze the situation in a rational way, using both past experience and logical thinking.
This mode of decision uses simplified models whose assumptions are products of imagination, and is the only method of reasoning permitted and expected by game theory.
Selten argues that individuals can always reach a routine decision, but perhaps not the higher levels.
The final decision is made on the routine level and governs actual behavior.