What Are the Game-Theoretic Implications for Liquidity Providers When Setting Overlapping Concentrated Liquidity Ranges?

When LPs set overlapping ranges, they create a competitive environment. LPs with tighter, more precise ranges around the current price can capture a larger share of fees, but they also face higher risk.

This leads to a game of chicken, where providers must balance the desire for higher fee concentration against the risk of their range becoming inactive. The collective behavior of LPs shapes the overall liquidity depth profile of an asset, with clusters of liquidity forming around psychologically significant price levels or expected trading ranges.