joint output of 1.33 times the monopoly output. Neither firm has an
incentive to depart from this position (except through enforceable
cooperation with the other). In any other cell, each firm has an incentive
to change its output given the output of the other firm.
The basis of a Nash equilibrium is rational decision making in the
absence of cooperation. Its particular importance in oligopoly theory is
that it is a self-policing equilibrium, in the sense that there is no need for
group behaviour to enforce it. Each firm has a self-interest to maintain it
because no move will improve its profits, given what other firms are
currently doing.
If a Nash equilibrium is established by any means whatsoever, no firm has an incentive to
depart from it by altering its own behaviour.*For those interested in a very readable treatment of game theory applied to many aspects of life,
see Thinking Strategically (Norton, 1993) by Avinash Dixit and Barry Nalebuff, two leading
economists.
1 In general, an economic “game” may have zero, one, or more Nash equilibria. For an example of
an economic setting in which there are two Nash equilibria, see Study Exercise 13 at the end of
this chapter.