NASH EQUILIBRIUM

A Nash equilibrium is a set of strategies, one for each player, such that no player has incentive to
change his or her strategy given what the other players are doing.
But what does Nash equilibrium mean intuitively? Another way of looking at it is, a Nash
equilibrium is a law that no one would want to break even in the absence of an effective police
force. Take a world in which police do not exist and the government passes a law. That law is a
Nash equilibrium only if everyone would want to follow it. So if everyone is following this law
despite the fact that there is no punishment, then thats going to be a Nash equilibrium because
no one wants to break it.
In terms of the real world, in some situations, following stoplights is a Nash equilibrium.
Suppose two cars are driving at each other from perpendicular directions, towards an
intersection. The stoplight is green for one of them and green for the other. Now imagine they
are in the world without police. If the police could not ticket the drivers, would anyone want to
break the law?
No they wouldnt. Thus it is a Nash equilibrium that they would want to follow the stoplight. We
can verify this by looking at the following matrix.






Player 1
Player 2
Go Stop
Go -5,-5 1,0
Stop 0,1 -1,-1


Both players may choose to go or to stop. If they both decide to go, they may crash into each
other and thats a really bad outcome for both of them (-5,-5). If both of them stop, they will both
be waiting for each other so it is wasting time (-1, -1). But if one of them goes and the other
stops, one of them will get to their destinations on time and in the fastest possible way while the
other player doesnt do that well as he has to stop and yield for the other player.

Now to find a Nash equilibrium. Look at the outcome where player 1 goes and player 2 stops.
Player 2 would not want to switch her strategy to Go if player 1s strategy is also Go as it would
lead to a car crash. Player 1 would also not want to change his strategy to Stop if player 2 is
stopping because he could reach his destination more quickly.
Similarly its also going to be a Nash equilibrium were Player 1 is stopping and Payer 2 is going.
Thus there are two pure strategy Nash equilibrium in this game.
Concluding, Nash equilibrium is a law that no one would want to break even in the absence of an
effective police force.


WHY COMPETITORS OPEN THEIR STORES NEXT TO ONE ANOTHER
Why are gas stations always built next to other gas stations? Why is it that you can you can drive
for miles without seeing a coffee shop and then stumble across three in a corner? Why do
grocery stores, auto repair shops and restaurants always seem to exist in groups instead if being
spread evenly through a community?
While there are several factors that might go into deciding where to place your business, clusters
of similar companies can be explained by a very simple story called Hotellings Model of
Spatial Competition.
Imagine that Player 1 is selling ice cream on a beach. The beach is one mile long and there is no
competition. Where would he place his cart in order to sell the most product? In the
middle. The half mile walk to the middle might be too far for some people from the end
of the beach. But in the middle, Player 1s cart serves as many people as possible.
The following diagram represents Player 1s position on the beach.






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The blue line is Player 1.
One day Player 1 arrives at the beach to see another ice cream seller with his own ice cream cart
approach. This other ice cream seller is Player 2.
Player 2 is selling the exact same ice cream as Player 1. Both players agree to split the beach in
half. In order to ensure that customers dont have to walk too much, Player 1 sets up his cart a
quarter mile north of the beach center and Player 2 sets up his cart a quarter mile south of the
beach center.
The following diagram shows Player 1(blue) and Player 2s (red) position on the beach.





With this agreement, the twenty five percent beach goers to the north of the beach will go to
Player 1, the twenty percent south of the beach will go to Player 2 and the remaining fifty
percent in between Player 1 and Player 2 will go to whichever ice cream seller is closest to them.
No one walks more than a quarter mile and both vendors sell to half of the beach goers. Game
theorists consider this a Socially Optimal Solution (S.O.S). It minimizes the maximum number of
steps any visitor must take in order to reach the ice cream cart.
The next day when Player 1 arrives at work he sees that Player 2 has set up his cart in the middle
of beach. Player 1 returns to his location a quarter mile north of center and gets the twenty five
percent of customers to the south of him. Player 2 still gets all of the customers in the south but
now both players split the twenty five percent of people in between the two carts. The situation is
represented in the diagram below.






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On day three of the ice cream wars, Player 1 arrives early and set up right in the center of Player
2s territory, assuming that he will serve the seventy five percent of the beach goers to the south.
This leaves Player 2 to serve the twenty five percent of the customers to the north. But when
Player 2 arrives, she sets up just to the north of Player 1, stealing all of the northern customers,
leaving just a small group of customers to the south. Their position are shown in the following
diagram:






However, not to be outdone, Player 1 moves ten paces north of Player 2 to regain his customers.
When Player 1 takes a midday break, Player 2 shuffles ten paces north of Player 1 and again
steals back all of the customer to the far end of the beach. Throughout the course of the day both
the players continue to move north towards the bulk of the ice cream buyers, until both the
payers ultimately end up at the center of the beach back to back, each serving fifty percent of the
ice cream hungry beach goers.
At this point, both the players have reached what game theorists call the nash equilibrium, the
point where neither of the players can improve their position by deviating from their current
strategy.
Nash Equilibrium:





The original strategy, where both players were a quarter mile from the center didnt last as it was
not a Nash equilibrium. Either player could move his cart toward the other to sell more ice
cream. But now, with both player at the center of the beach, neither player an reposition their
carts closer to their furthest customers without making their current customers worse off.
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However, there is no longer a Socially Optimal Solution (S.O.S.), since customers at either end
of the beach have to walk furtherer than necessary to buy an ice cream.
Think about all the fast food chains, clothing boutiques or mobile phone kiosks at the mall.
Customers may be better served by distributing services throughout a community but this leaves
businesses vulnerable to aggressive competition. In the real world, customers come from more
than one direction and businesses are free to compete with marketing strategies, by
differentiating their product line and with price cuts. But at the heart of their strategy, companies
like to keep their competition as close as possible.

Uses of Nash Equilibrium Strategy

According to the ISID Encyclopedia of Science and Philosophy, the concept of nash equilibrium
is used when we predict things about people and are used in the following types of analysis:


Causes of war
Agenda manipulation in legislature
Actions of interest groups
Candidates election strategies
Additionally, Nash equilibrium is used in business decisions. Nash equilibrium strategies can be
used in the use of advertising decisions, quality decisions, and pricing and product mix decisions.
Business managers also use Nash equilibrium strategies to analyze interactions between workers
and managers and to monitor the actions of employees.