Question

In a market where there are many price-taking buyers and sellers, there are many possible equilibrium prices. Each of these prices represents a Nash equilibrium for this market.

True or False?

Answer 1

A market with many price taking buyers and sellers is a feature of Perfectly competitive market.Knowledge is available to all buyers and sellers, and no individual has control over the prices.

A firm’s demand curve is derived with the help of the market’s demand and supply curve. In perfect competition, the equilibrium of the market’s demand and supply determines the price.All firms receive this price in a perfectly competitive market. Also, firms are the price-takers and the industry is the price-maker. The Average Revenue (AR) Curve is the demand curve of the firm as it can sell any quantity it wants at the market price.




Nash equilibrium is a a stable state of a system involving the interaction of different participants, in which no participant can gain by a unilateral change of strategy if the strategies of the others remain unchanged.
The number of the firms is so large and change of price by a singe seller has a negligible impact.If the seller sells at a price below the equilibrium price he suffers losses as all firms have similar cost structure,On the other hand if the seller raises his price.he will not get revenue as long as other sellers keep a lower price because customers won't buy the product at higher price.
The only way a seller will be able to sell his product at a higher price is if all the sellers raise the price.Therefore each price represents the Nash equilibrium for this market.
Each price is a stable state and no one will able to benefit until all the participants don't change their strategy.No single participant will be able to earn a higher payoff by unilaterally deviating from his pricing policy.