The crux of any business is strategy and execution. If you are an entrepreneur, there are many important decisions that you will need to make whilst steering the wheels of your trade. Though, business instincts, rationalisation, and experience play a great role in implementing these decisions, it doesn’t hurt to rely on statistical and economic analysis from time to time to verify the accuracy of the decisions. Because these decisions can make or break your business.
Nash Equilibrium
One such important tool is the Nash Equilibrium, formulated by the American mathematician John Forbes Nash Jr, who won a Nobel Prize in 1994 for this discovery. Nash Equilibrium is a solution concept which reflects how important decisions that are good for individuals can sometimes be not so good for groups. This simple concept helps economists work out how competing companies set their prices, analyse strategies in marketing, predict market risks, etc. Nash equilibrium has always helped economists to raise billions in the public interest, especially in auctions. In the year 2000, the UK government used this concept to come up with a unique auction that successfully sold its operating licenses for 3G mobile-telecoms for billions. They utilized the auction as a strategic game and tweaked the policies such that the best way for bidders to move forward was to make aggressive bids, which in turn raised the auctioneers billions of pounds.
So, how does Nash equilibrium really matter to your business?
Here is a video that explains it beautifully.
The Nash Equilibrium method of analysis is used to analyse the results of the strategic interaction of a group of decision makers. Two business giants developing pricing strategies to compete against each other will seemingly crunch customers harder than they would, if they each faced, even more, number of competitors. The point is insufficient number of competitors may lead to unreasonable pricing, unhappy customers, market loss and decline for any healthy business. This approach explains why we overuse the natural resources, exhaust nonrenewable energy, and deforest land.
We do not inspect the consequences of what our decisions will have on the masses. We do not consider the decisions of others impacting the same resources at the same time. Sustainability will be easier if only we could restrict ourselves from extreme actions. Nash Equilibrium helps the decision makers come up with solutions to tricky problems making it easier for businesses to sustain.
An earlier edition of the Nash equilibrium methodology was first known to be implemented by Antoine Augustin Cournot in 1838. His theory was called oligopoly. In his theory, firms choose the quantity of output to be produced in order to optimize their own profit. He also stated that the best output for one firm depends on the outputs of others. However, Nash’s definition of equilibrium is more detailed than Cournot’s.
In simpler words, Nash equilibrium defines a way of forecasting what will happen if many people or businesses are making decisions at the same time and if the outcome is dependent on the decisions made by others. The idea behind Nash Equilibrium theory is that one cannot forecast the outcome of the choices to be made by a group of decision makers if one takes into consideration each of those decisions in exclusivity. Instead, one should communicate with the other decision makers, taking into consideration the decision taken by others to adjudicate the best impact on a business.
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