Common knowledge is generally a dizzying concept. But, a single stage of reasoning, or even two, often misses strategic complexity, as in this episode (production number 467664 from season 5, "The one where everybody finds out"):

Rachel: Phoebe just found out about Monica and Chandler.
Joey: You mean how they're friends and nothing more? (Glares at Rachel.)
Rachel: No. Joey, she knows! We were at Ugly Naked Guy's apartment and we saw them doing it through the window. (Joey gasps) Actually, we saw them doing it up against the window.
Phoebe: Okay, so now they know that you know and they don't know that Rachel knows?
Joey: Yes, but y'know what? It doesn't matter who knows what. Now, enough of us know that we can just tell them that we know! Then all the lying and the secrets would finally be over!
Phoebe: Or, we could not tell them we know and have a little fun of our own.
Rachel: Wh-what do you mean?

And later:

Joey: I'm sorry! But hey, it's over now, right? Because you can tell them that you know they know and I can go back to knowing absolutely nothing!
Monica: Unless...
Joey: No! Not unless! Look this must end now!
Monica: Oh man, they think they are so slick messing with us! But see they don't know that we know that they know! So...
Chandler: Ahh yes, the messers become the messies!

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