The Basics
- Simple definition: A situation where each player in a game chooses their best strategy, given the strategies chosen by others, and no player has an incentive to change unilaterally.
- Core idea: Stable outcome where everyone is doing the best they can, considering what others are doing.
- Think of it as: No regrets – given what others did, you wouldn’t change your choice.
What It Actually Means
Named after John Nash (Nobel Prize, portrayed in “A Beautiful Mind”), this concept revolutionized economics. In the Nash equilibrium, each player’s strategy is a best response to others’ strategies. No one can improve their payoff by changing alone. Games may have zero, one, or multiple Nash equilibria. Not necessarily efficient (prisoner’s dilemma shows a bad equilibrium). It’s the central solution concept in non-cooperative game theory.
Example
In the cement pricing game, if both firms keep prices high, each might be tempted to cut. But if both expect the other to cut, they’ll both cut – a Nash equilibrium (though worse for both). The high-price outcome isn’t an equilibrium because each could gain by cutting.
Why It Matters
Nash equilibrium predicts behavior in strategic settings – oligopoly, auctions, bargaining. It underlies modern economics and appears throughout microeconomics, industrial organization, and political economy.
See also
Game Theory • Prisoner’s Dilemma • Dominant Strategy • Best Response • Strategic Interdependence
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