Wednesday, January 20, 2016

Nash’s interpretations of equilibrium: Solving the objections to Cournot

Jorge M. Streb describes Nash’s interpretations of equilibrium: Solving the objections to Cournot.

ABSTRACT: A Nash equilibrium can also be seen as a Cournot-Nash equilibrium, though this is debated because Cournot provided a specific application, not a general formulation. In my view, another of Nash’s fundamental contributions stands out when contrasting him to Cournot. Cournot treated economic decisions as optimization problems, but his stability analysis of duopoly led to endless discussions because players did not use the available information. Nash solves this with his rational interpretation: when players know the structure of the game, they can use the solution to predict the equilibrium. He thus introduces rational expectations. Nash additionally offers an adaptive interpretation: when players do not know the structure of the game, they can adjust their strategies to maximize payoffs. These adaptive expectations were anticipated by Cournot in his analysis of monopoly. In brief, Nash was not only extraordinary as a mathematician; his deep insights allo! w solving decades-long debates in economics.

https://lawprofessors.typepad.com/antitrustprof_blog/2016/01/nashs-interpretations-of-equilibrium-solving-the-objections-to-cournot.html

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