Scribd
Upload
27 views4 pages

Nash Equilibrium Economics

Nash Equilibrium, introduced by John Nash in the 1950s, is a key concept in game theory where each participant's strategy is optimal given others' strategies, leading to no player benefiting from changing their strategy unilaterally. It applies to various game types, including simultaneous, sequential, cooperative, and non-cooperative games, with significant implications in economics such as oligopoly pricing and auction theory. Despite its foundational role, Nash Equilibrium has limitations, including assumptions of rationality and the potential for multiple equilibria.

Uploaded by

nuniwalker729
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
27 views4 pages

Nash Equilibrium Economics

Nash Equilibrium, introduced by John Nash in the 1950s, is a key concept in game theory where each participant's strategy is optimal given others' strategies, leading to no player benefiting from changing their strategy unilaterally. It applies to various game types, including simultaneous, sequential, cooperative, and non-cooperative games, with significant implications in economics such as oligopoly pricing and auction theory. Despite its foundational role, Nash Equilibrium has limitations, including assumptions of rationality and the potential for multiple equilibria.

Uploaded by

nuniwalker729
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 4

Nash Equilibrium in Economics

Introduction
In the realm of economics and game theory, the concept of Nash Equilibrium stands as a
cornerstone of strategic decision-making. Named after mathematician John Nash, who
introduced the idea in the early 1950s, Nash Equilibrium describes a situation in which
each participant in a game chooses their optimal strategy given the strategies chosen by
others, and no player has anything to gain by changing only their own strategy. This
equilibrium concept applies broadly to economics, political science, evolutionary
biology, and beyond.

Historical Background
The foundation of Nash Equilibrium was laid in John Nash's 1950 doctoral dissertation at
Princeton University. Building on earlier work by John von Neumann and Oskar
Morgenstern, Nash's equilibrium concept provided a more generalized solution to non-
cooperative games. In 1994, Nash was awarded the Nobel Memorial Prize in Economic
Sciences for this groundbreaking work, which revolutionized the study of strategic
interaction.

Basic Definitions and Concepts


Game Theory is the study of mathematical models of strategic interaction among rational
decision-makers. A game in this context consists of:

- A set of players

- A set of strategies available to each player

- A payoff function for each player, which depends on the strategy profile chosen by all
players

Nash Equilibrium occurs when:

- Each player selects a strategy that maximizes their payoff, given the strategies of other
players

- No player can benefit by unilaterally changing their strategy


Mathematically, a strategy profile (s1*, s2*, ..., sn*) is a Nash Equilibrium if for each
player i:

Ui(si*, s-i*) >= Ui(si, s-i*) for all si in Si

where s-i* denotes the strategies of all players except i.

Types of Games
Nash Equilibrium can be applied to various types of games:

- Simultaneous vs Sequential Games: In simultaneous games, players choose strategies


without knowledge of others' choices. In sequential games, players make decisions in
turn.

- Cooperative vs Non-Cooperative Games: Nash Equilibrium applies primarily to non-


cooperative games, where binding agreements are not possible.

- Zero-Sum and Non-Zero-Sum Games: In zero-sum games, one player's gain is another's
loss. Non-zero-sum games allow for mutual gain or loss.

Examples of Nash Equilibrium


The Prisoner's Dilemma:

Two criminals are arrested and interrogated separately. Each has the option to confess
(defect) or remain silent (cooperate).

- If both confess, each gets 5 years in prison.

- If one confesses and the other remains silent, the confessor goes free and the silent one
gets 10 years.

- If both remain silent, each gets 1 year.

The Nash Equilibrium in this case is for both to confess.

Battle of the Sexes:

A couple wants to go out together but prefers different activities.

- If both choose the same event, they are happy (though not equally so).

- If they choose differently, both are unhappy.


There are two Nash Equilibria here, where both coordinate on either activity.

Existence and Uniqueness


Nash proved that at least one Nash Equilibrium exists for any finite game with mixed
strategies. However, equilibrium may not be unique. Multiple equilibria can lead to
ambiguity in predicting outcomes. Finding all Nash Equilibria in large or complex games
can be computationally challenging.

Applications in Economics
Nash Equilibrium has wide applications across various branches of economics:

- Oligopoly Pricing: Firms choose prices or quantities to maximize profit given


competitors’ decisions (e.g., Cournot and Bertrand models).

- Auction Theory: Bidders strategize based on the rules of the auction and the expected
behavior of others.

- Public Goods and Free-Rider Problems: Individuals decide how much to contribute to a
public good, considering others’ contributions.

- Labor Markets and Wage Bargaining: Employers and employees negotiate wages based
on expected reactions.

Criticisms and Limitations


Despite its strengths, Nash Equilibrium has some limitations:

- Rationality Assumption: Assumes all players are fully rational and have complete
information.

- Multiple Equilibria: Can lead to indeterminate outcomes unless additional criteria (e.g.,
focal points, refinements) are applied.

- Dynamic Considerations: Does not account for how players might learn or adapt
strategies over time.

Extensions and Refinements


Several refinements of Nash Equilibrium have been developed:

- Subgame Perfect Equilibrium: Applied to dynamic games to rule out non-credible


threats.
- Bayesian Nash Equilibrium: Extends the concept to games with incomplete information.

- Evolutionarily Stable Strategy (ESS): Used in biology to describe strategies that persist
in populations.

Conclusion
Nash Equilibrium remains a central concept in modern economic theory. While not
without limitations, it provides a foundational framework for analyzing strategic
interactions in competitive and cooperative environments. As new fields emerge and
decision-making contexts evolve, the relevance and adaptability of Nash's insights
continue to grow, influencing both theoretical research and practical applications.

References
1. Nash, J. (1950). "Equilibrium Points in N-Person Games," Proceedings of the National
Academy of Sciences, 36(1), 48–49.

2. Osborne, M.J., & Rubinstein, A. (1994). A Course in Game Theory. MIT Press.

3. Myerson, R. B. (1991). Game Theory: Analysis of Conflict. Harvard University Press.

4. Gibbons, R. (1992). A Primer in Game Theory. Prentice Hall.

5. Tirole, J. (1988). The Theory of Industrial Organization. MIT Press.

You might also like