Definition
Nash Equilibrium
A Nash equilibrium is a state in a strategic game where no player can improve their outcome by unilaterally changing strategy, given the others' choices.
Named after mathematician John Nash, it is the cornerstone solution of game theory. In an oligopoly, prices may settle at a Nash equilibrium where each firm's price is the best response to its rivals'.
A Nash equilibrium isn't always the best collective outcome, as the prisoner's dilemma shows, players can be stuck in a mutually worse position because cooperating is individually risky. It helps explain pricing standoffs, arms races and the difficulty of sustaining cartels.
Related terms
- OPECOPEC is the Organization of the Petroleum Exporting Countries, a cartel of major oil producers that coordinates output to influence global crude prices.
- MonopolyA monopoly is a market with a single seller and no close substitutes, giving that firm power to set prices above competitive levels and restrict output.
- OligopolyAn oligopoly is a market dominated by a few large firms whose decisions are interdependent, often leading to price rigidity, tacit coordination or fierce competition.
- Game Theory in MarketsGame theory studies strategic decision-making among interdependent players, used to model oligopoly pricing, cartels, auctions and central-bank credibility.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.