Microeconomics For Dummies

Chapter 17

Keeping Things Stable: The Nash Equilibrium

In This Chapter

Digging deeper into the Nash equilibrium

Discovering when a Nash equilibrium has to exist

Applying the Nash equilibrium

As we explain in Chapter 16 on game theory, the Nash equilibrium is a combination of strategies whereby each player is doing the best she possibly can given the strategies of the other players. Read the nearby sidebar “A Nash equilibrium aids human survival” for a somewhat chilling example.

Knowing about a Nash equilibrium and how you find one are important for understanding how economists go about looking at issues of competition and cooperation. As we describe in this chapter, economists use the concept of a Nash equilibrium to go beyond exchanges in markets and into wider questions of organizational behavior, bargaining, and even international negotiations, without giving up economic rationality.

A Nash equilibrium is a situation where no one has an incentive to change behavior. In that sense, Nash equilibria tend to be stable as long as the conditions around them stay stable. For instance, in the sidebar example, the peace between the nuclear powers was maintained for as long as nuclear ...