The Nash Equilibrium

in LeoFinance3 months ago

bill and Rachel are two competitors who sell lemonade at $1 per glass each person sells 200 glasses daily and after subtracting expenses from the $200 revenue is left with $100 as pure profit to oversimplify you put 50 cents in your pocket after each $1 sale one day bill thinks about offering eliminate of just 80 cents so 30 cents in profit per glass however one he'd have to sell 334 glasses instead of 200 to earn $100 and 20 cents in profit so attract 134 of Rachel's 200 customers just so he can make about the same amount as he is now - Rachel won't just stand there and lose customers she'd lower prices as well in the end he assumes both of them will most likely earn less than they do now the same thoughts probably crossed Rachel's mind as well and she came to the same conclusion therefore both of them keep prices at one dollar and from a game theory perspective we called a situation a state of Nash equilibrium named after the famous mathematician John Nash the Nash equilibrium is basically a situation where two or more competitors decide are better off not changing their existing strategy as a quick test start watching our video about the prisoner's dilemma and try to identify its Nash equilibrium