NASH EQUILIBRIUM

Presented by

ME Presentation 2

Boopalan (15MB07),
Nithya S. (15MB17),
Satham Hussain S. (15MB29)
& Varunya Sree M. (15MB36)

OVERVIEW

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John Nash
Game Theory
Strategies in Game Theory
Dominant Strategy Equilibrium
Nash Equilibrium
Difference between equilibria
Limitations

INTRODUCTION
Developed by John Forbes Nash Jr. an
American mathematician
Nash equilibrium - aids decision
making complex systems in daily life
Applications
include
economics,
computing,
evolutionary
biology,
artificial
intelligence,
accounting,
computer science, games of skill, politics
and military theory
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JOHN NASH
Shared the 1994 Nobel Prize in Economic
Sciences with two other game theorists
Suffered from mental illness called
paranoid schizophrenia
Struggle with illness basis for
biography Beautiful Mind by Sylvia
Nasar in 1998
In 2001, movie by the same name with
Russell Crowe playing Nash
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GAME THEORY
Nash Equilibrium - fundamental concept in game theory
Game theory - study of mathematical models of conflict and
cooperation for making decisions in situations involving
interdependence
Strategic decisions - managers in Oligopoly markets - simultaneous &
non-cooperative game individual decisions independently without
knowledge of rivals decisions
Components of a game
Players
Strategy
Payoff combinations of all strategies of players involved
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STRATEGIES
Dominant strategy always provides the best outcome regardless of
rivals decisions
Dominated strategy never chosen because there is always a better
strategy
Concept 1: Both players have dominant strategies, they will play them
dominant strategy equilibrium
Concept 2: A has dominant strategy , B does not, so B can predict
that A will choose As dominant strategy and B will devise a best
strategy for itself
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PRISONERS DILEMMA
Dominant strategy CONFESS

Dominated strategy SILENT

DOMINANT
EQUILIBRIUM

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STRATEGY

NASH EQUILIBRIUM
Nash Equilibrium a stable state of a system that involves
several interacting participants in which no participant can gain
by a change of strategy as long as other participants remain
unchanged
May not be best or optimal joint outcome, but best response to
others strategies
Strategic Stability individual player cannot unilaterally
change decision to improve payoff

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PRISONERS DILEMMA
NASH

(4)Not Nash - Globally

Optimal Situation unstable
state
(3)Not Nash
(2)Not Nash
(1)Nash Equilibrium stable
state
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OPTIMAL

NASH MUTUALLY BEST

GAME BUDGET
PAYOFF

Pepsis Budget
Better Payoff Outcome

Low

Cokes
Budget

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Low

C $60,

Medium

$45

Medium

$50, $35

High

$45, $10

$57.5, $50
P

High
P

$45, $35

$65, $30
$60, $20

$30, $25
C

$50, $40

Unique Nash Equilibrium

NASH & DOMINANT

STRATEGY EQUILIBRIA
NASH EQUILIBRIUM

DOMINANT STRATEGY EQUILIBRIUM

Both the firms are making the best

decisions given the decision they
believe their rivals will make

Both firms make best decisions no matter

what the rival does

Nash equilibria often do occur

without either dominant or
dominated strategies

Managers believe rivals choose their dominant

strategies, hence all dominant strategy
equilibria are Nash equilibria

Eg.: Coke-Pepsi Game Budget

Eg.: Prisoners dilemma

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LIMITATIONS
Practically difficult and uncertain
Multiple Nash Equilibria unable to predict the best possible
payoff with rivals decision in mind
Strategic decision making helps managers
Only when rivals understand and follow strategic decision making
Rival managers view payoff table in a similar manner

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Thank You !
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