tag:blogger.com,1999:blog-8653124926080909646.post5243911062635777241..comments2022-03-24T19:43:30.499-04:00Comments on Econ Bonus Question of the Week: A Beautiful Equilibrium?Greg Delemeesterhttp://www.blogger.com/profile/06906288835189259424noreply@blogger.comBlogger3125tag:blogger.com,1999:blog-8653124926080909646.post-18236202015306640452009-02-20T14:51:00.000-05:002009-02-20T14:51:00.000-05:00The Nash Equilibrium of this problem would be both...The Nash Equilibrium of this problem would be both Coca-Cola and Pepsi cutting prices. While this seems absurd, it is actually the only logical thing to expect from a competitive firm. <BR/>Setting lower prices is a dominant strategy for a competitive firm. Both Pepsi and Coca-cola will cut their price, in hopes of a lucrative $100 profit if the other company maintains original price and in the end they will both simply make less than before. This is called competitive outcome. While we may see equilibrium as keeping the status-quo, Coca-Cola and Pepsi will look to under-cut each other and drive the price down. <BR/>This was shown in A Beautiful Mind by John Nash and his friends strategically going after lesser attractive women at a bar. If they all went for the obviously more attractive girl they would most likely get shot down. While they are all settling for less they still “get some”. Yet this phenomenon of cooperative outcome is almost never seen. <BR/>In the end, both companies will make less than they would have because neither can afford to try to maintain price.Jake Verdoornhttps://www.blogger.com/profile/13521693838838106466noreply@blogger.comtag:blogger.com,1999:blog-8653124926080909646.post-71077541792910623052009-02-16T12:17:00.000-05:002009-02-16T12:17:00.000-05:00Not quite, Anthony. Give it another try.Not quite, Anthony. Give it another try.Greg Delemeesterhttps://www.blogger.com/profile/06906288835189259424noreply@blogger.comtag:blogger.com,1999:blog-8653124926080909646.post-44444201120235231792009-02-10T00:12:00.000-05:002009-02-10T00:12:00.000-05:00There are two Nash equilibria in this game. Each f...There are two Nash equilibria in this game. Each firm is making a choice to maximize their profit. Either they will both maintain their price, or they both will cut their price. Neither will let the other cut their price without cutting their own. This way both companies will maximize profit.Anthony Sayrehttps://www.blogger.com/profile/18433097722247403131noreply@blogger.com