Nash Equilibrium in Oligopoly Market

Nash equilibrium is the word which is used in the context of game theory, it refers to that situation where an equilibrium is established when all the players know each others strategy still they do not change their strategy. It can be better understood with the help of a simple example suppose in car race between two person A and B, A has a long car and B has short or mini car and there are 2 routes one is crowded but it short in distance and another route though long in distance but it is a highway. Now A will have to go through highway as his or her car is long and B will take the shorter route, both A and B know about the route which other party will take still they will not change their strategy and that process of not changing the racing route by either of the parties is called Nash equilibrium.

Nash equilibrium application in Oligopoly market
Before looking at application of Nash equilibrium in oligopoly market one must understand what is oligopoly market, in oligopoly market there are few big firms or companies which hold majority of market share and that give them some pricing power or in simple words oligopoly is a market structure where there are few sellers and many buyers in the market.
Now Nash equilibrium can be applied to oligopoly because in the case of oligopoly each firm knows the other firms strategy as they all sell similar products but each firm product is slightly differentiated from each other and that is the reason why each firm can charge different price as compared to other firms. Now suppose there are two smartphone manufacturers offering similar type of smartphone when it comes to phone specifications while the only difference being one smartphone manufacturer is offering smartphone having good camera as its target market is young generation while another smartphone manufacturer is offering smartphone having good battery life as its target market is business class people who travel more. Now if Nash equilibrium is applied then both the smartphone manufacturer know about each others product differentiation strategy but still they will not change their company’s strategy or specification of their smartphones as their target market is different and according to that target market their smartphone is perfect and hence it does not need any alteration.

As one can see from the above that Nash equilibrium is a very useful concept when it comes to oligopoly market structure and it can provide effective solutions towards the problems faced by the firms in oligopoly market.

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