Question

1.Explain the meaning of a Nash equilibrium. How does it differ from a dominant strategy equilibrium?

2.What is meant by “first mover advantage”? How might moving first give one an advantage in a duopoly situation?

Answer 1

1. Nash Equilibrium is the best strategy that a player takes in a game and he has no incentive to shift from his chosen strategy, taking into consideration the other player's decision. It is was developed by Prof. John Nash.

A dominant strategy is a choice of strategy of a player that dominates the other available strategies of other players. It is the best strategy no matter what the other player plays. While, nash equilibrium is the best strategy in response to the other players strategy.

A dominant strategy is a Nash equilibrium, the converse maynot be true.

2. The first mover advantage is the comparitive advantage that a players gains because he entered the market, first. In a Stackelberg sequential game of duopoly. If firm 1 has a first mover advantage, then it will be the leader and can limit firm 2's options. Adoption of a high initial production capacity gives firm 1 an advantage and hence no much options are left for firm 2.