Prateek Gupta (36)

John Forbes Nash

This concept is named after its inventor who is an American mathematician named John Nash.

He won 1994 Nobel Memorial Prize in Economic Sciences.

A concept of game theory where the optimal outcome of a game is one where no player has an incentive to deviate from his or her chosen strategy after considering an opponent's choice.

OR

Set of strategies or actions in which each firm does the best it can given its competitors’ actions.

Definition

Dominant Strategies:

- I’m doing the best I can no matter what you do.

- You’re doing the best you can no matter what I do.

Nash Equilibrium:

- I’m doing the best I can given what you are doing.

- You’re doing the best you can given what I am doing.

Dominant strategies vsNash Equilibrium

Oligopoly model in which firms produce a

homogeneous good, each firm treats the output of its competitors as fixed, and all firms decide simultaneously how much to produce.

Since no firm has an incentive to change its output unilaterally as each firm is doing the best it can given the decisions of its competitors. Thus a Cournot equilibrium is a Nash equilibrium.

Cournot Equilibrium

Example

Product choice problem: Two breakfast cereal companies face a market in which two new variations of cereal can be successfully introduced.

The Beach Location Game

You (Y) and a competitor (C) plan to sell soft drinks on a beach.

If sunbathers are spread evenly across the beach and will walk to the closest vendor, the two of you

will locate next to each other at the center of the beach. This is the only Nash equilibrium.

If your competitor located at point A, you would want to move until you were just to the left, where you

could capture three-fourths of all sales.

But your competitor would then want to move back to the center, and you would do the same.

Beach Location Game

Thank you