Nash's Interpretations of Equilibrium: Solving the Objections to Cournot
Serie Documentos de Trabajo - Documento No. 575
23 Pages Posted: 10 Nov 2015
Date Written: November 1, 2015
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 allow solving decades-long debates in economics.
Keywords: equilibrium, rational players, consistent beliefs, adaptive expectations, rational expectations
JEL Classification: B1, B2, B3, C7
Suggested Citation: Suggested Citation