Question

Define Nash Equilibrium and how it can be applied

Answer 1

In game theory Nash equilibrium, named after John Nash,  occurs when there is no incentive for the player to deviate from their initial strategy. The Nash equilibrium is a concept within game theory where the optimal outcome of a game is one when no player has an incentive to deviate from his chosen strategy after considering an opponent's choice. A game may have multiple Nash equilibrium or none at all. Each player's get what they desire, so it's a win-win situation.

Assume there are two competing companies: Company X and Company Y. Both companies want to determine whether they should launch a new advertising campaign for their products. If both companies advertise, each company will attract 1000 new customers. If only one company advertises, it will attract 2000 new customers, on the contrary other company will not attract any new customers. If both companies decide not to advertise, neither company will add new customers.

Company A should advertise its products because the strategy provides a better payoff than the option of not advertising. The same situation exists for Company B. hence, the scenario when both companies advertise their products is a Nash equilibrium.