The Nash equilibrium, a decision-making theorem within game theory, offers an interesting insight into the dynamics of price leadership maneuvering between businesses, and how this interacts with antitrust law.
The Nash equilibrium is commonly cited as a strategy for achieving an optimal balance in non-co-operative situations, such as price-setting. Recent research has, however, demonstrated how the achievement of Nash equilibrium can be seen as tacit co-operation between businesses.
Companies reacting independently to market trends, without collusion, is the most desirable market dynamic. True equilibrium occurs when, at a given market price, neither firm has an advantage in adopting another strategy. This means that the firms have independently reached the position they would have undertaken by agreement, without actually co-operating; according to John Nash: "each player's strategy is the best response to the other player's strategy".
Read the full article here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.