Nash Equilibrium  Explained
What is the Nash Equilibrium?
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What is the Nash Equilibrium?
The Nash equilibrium is a popular gaming theory that was developed by John Forbes Nash, a mathematician. This theory presents the optimal solution in a game where both players are noncooperative due to lack of incentive to change their plans or strategy. According to the Nash equilibrium, despite that each player is perceived to know the opponents strategies, there are unwilling to change their initial strategy since there is nothing to gain by changing their strategy. Hence, both players stick to their initial strategies, rather than switching to a new strategy.
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How does the Nash Equilibrium Work?
Nash equilibrium is a concept that maintains that when players of a game perceive that there is no benefit they can derive from changing their actions or strategies, they maintain their initial strategy throughout the game, despite that they are aware of the opponents strategy. In a game, it is possible to have no nash equilibrium or have multiple nash equilibrium. Given that players in a game strive to get what is best for them in a game, the inventor of the nash equilibrium, John Nash developed the gaming concept. Hence, when there is no incentive or benefit of changing a strategy, players do not deviate from the original plan. The nash equilibrium is not limited to the gaming industry, it can be applied in various disciplines. The belief of a player that he has nothing to gain by changing his strategy, even after being aware of the opponent's strategy gave rise to the development of the Nash equilibrium. According to this gaming theory, each player wins by not deviating from the initial strategy, all the players get their desired result. The Nash equilibrium is largely proven if players do not deviate from their initial strategy after each players technichique is shown to the other players. No deviation occurs since there is no incentive attached to changing their strategy.
Prisoner's Dilemma
A popular game used to exemplify the Nash equilibrium is the prisoners dilemma. A prisoners dilemma is a scenario in which there are two criminals kept in different custodies and both have no means to talk to each other. Due to lack of evidence by the prosecutor, the prosecutor meet each of the prisoners and tells them to betray each other or tells one not to talk about the crime and the other suspect testifies against the one that is silent. It is vital to know that if both parties choose to betray each other, they are served jail term and if one betrays the other, one is set free and the silent one spends time in prison. However, if they both decide to remain silent on the matter, they will both serve a year in prison. In this example, cooperation between the two will give a better outcome but since the suspects see that they will gain by betraying the other, they are likely going to betray each other.
Related Topics
 Market Structure
 Perfect Competition
 Bidding War
 Complements & Substitutes
 Substitution Effect
 Imperfect Competition
 Market Power
 Price Takers
 Price Makers
 Perfect Competition and Decision Making
 XEfficiency
 Captive Market
 Contestable Market Theory
 Highest Profit Point in a Perfectly Competitive Market
 Marginal Revenue
 Using Marginal Revenue and Marginal Costs to Maximize Profit
 Marginal Revenue Curve
 Profit Margin and Average Total Cost
 Break Even Point  Cost Curve
 Shutdown Point  Cost Curve
 ShortRun Decisions Based Upon Costs in a Perfectly Competitive Market
 Marginal Costs and the Supply Curve for a Perfectively Competitive Firm
 LongRun Average Supply (LRAS)
 Decisions to Enter or Exit a Market in the Long Run
 LongRun Equilibrium in a Perfectly Competitive Market
 Constant, Increasing, and Decreasing Cost Industries
 Productive and Allocative Efficiency in Perfectly Competitive Markets
 Market Efficiency
 Market Inefficiency
 Pareto Efficiency
 Market Failure
 Search Theory
 Monopoly
 Natural Monopoly
 Legal Monopoly
 Bilateral Monopoly
 Promoting Innovation through Intellectual Property
 Predatory Pricing
 How Monopolists Set Price with the Demand Curve
 Total Cost and Total Revenue for a Monopolist
 Marginal Revenue and Marginal Cost for a Monopolist
 Inefficiency of Monopoly
 Perfectly Competitive Market
 Monopolistic Competition
 Duopoly
 Oligopoly
 Differentiated Products
 Perceived Demand for a Monopolistic Competitor
 Monopolistic Competitors Choose Price and Quantity
 Monopolistic Competitors and Entry
 Monopolistic Competition and Efficiency
 Cartel (Economics)
 Game Theory
 Traveler's Dilemma
 Prisoner's Dilemma
 Iterated Prisoner's Dilemma
 Nash Equilibrium
 Diner's Dilemma
 Trembling Hand Perfect Equilibrium
 Gambler's Fallacy
 Arrows Impossibility Theorem
 Backward Induction
 Tournament Theory
 Oligopoly and the Prisoner’s Dilemma
 Forcing Cooperation in a Prisoner’s Dilemma
 Cooperation and the Kinked Demand Curve
 Corporate Merger or Acquisition
 Antitrust Laws
 HerfindahlHirschman Index
 Concentration Ratio
 Other Approaches to Measuring Monopoly Power in an Industry
 Restrictive Practices under Antitrust Law
 Natural Monopoly
 CostPlus Regulation
 Price Cap Regulation
 Regulatory Capture