Which statement most nearly describes a Nash equilibrium applied to price competition?
A) Two firms cooperate and set the price that maximizes joint profits.
B) Each firm automatically moves to the purely competitive equilibrium because it knows the other firm will eventually move to that price anyway.
C) Given the prices chosen by its competitors, no firm has an incentive to change their prices from the equilibrium level.
D) One dominant firm sets the price, and the other firms take that price as if it were given by the market.

Question

Quizplus · Accepted Answer

In a Nash equilibrium, no firm has an incentive to deviate from their current strategy given the strategy of their competitors. Applied to price competition, this means that given the prices set by their competitors, no firm has an incentive to change their price from the equilibrium level. This is because any deviation from the equilibrium price would result in a decrease in profits. Therefore, option C best describes the Nash equilibrium applied to price competition.

Which Statement Most Nearly Describes a Nash Equilibrium Applied to Price