chapter  4
Backward induction and repeated games
Pages 57

The Nash equilibrium concept is quite powerful. In many economic, management and political topics it gives nice hints which help in making a decision. Especially in auction theory, more generally in industrial and financial economics, the Nash equilibrium cannot be bypassed. This chapter discusses people see the power of the Nash concept in common value auctions, its ability to highlight the winner's curse, how it allows countering Akerlof's reasoning in the lemon car model, and so on. Nash equilibrium requires minimal stability: if a strategy profile isn't Nash equilibrium, then at least one player is better off switching to another strategy without any help or co-deviation from somebody else, so it has indeed very little stability. The chapter defines the concept and applies it to normal form games, namely to the first price sealed bid all pay auction. It starts moderating people's enthusiasm.