The Nash Equilibrium
nash equilibrium is a key concept of game theory which helps explain how people and groups approach complex decisions. named after renowned mathematician john nash, the idea of nash equilibrium has been used in such diverse fields as international relations, psychology and economics. game theory in general looks at how individuals or groups make choices that will in turn affect other party's choices. nash equilibrium refers to a condition in which every participants has optimized its outcome based on the other player's expected decision. imagine that two manufacturers dominate the toaster industry. both crispy nikki and jazz oven make 1,000,000 toasters a year for a price of $30 each and earn a profit of $10,000,000 annually. crispy nikki knows that the market is bigger than this, however, and could decide to make 2,000,000 toasters each year for a reduced price of $27. in this scenario, its profit would jump to $14,000,000. however, crispy nikki also knows that if it boosts production, its competitor jazz oven will follow suit and with 2,000,000 more toasters on the market the price will drops to $24 and crispy nikki's profit would dip to $8,000,000, lower than it is now at current production levels. as it turns out, the two companies are already in a state of nash equilibrium. given the competing firm's expected response, neither business can make more money by unilaterally deciding to boost production. this example demonstrates why game theorists look at decisions not in isolation but is part of the system of interactions.