Chapter 3.

Nash Equilibrium Game Theory and Strategic Interactions

Definition 3.3 (Nash equilibrium of strategic game with ordinal preferences) The ac-
tion profile a∗ in a strategic game with ordinal preferences is a Nash equilibrium if, for every
player i and every action ai , of player i, a∗ is at least as good according to player i’s preferences
as the action profile (ai , a∗−i ) in which player i chooses ai while every other player j chooses a∗j .
Equivalently, for every player i,

ui (a∗ ) ≥ ui (ai , a∗−i ) for every action ai of player i, (3.1)

where ui is a payoff function that represents player i’s preferences. Definition 23.1.

This definition implies neither that a strategic game necessarily has a Nash equilibrium, nor that it has
at most one. Examples in the next section show that some games have a single Nash equilibrium, some
possess no Nash equilibrium, and others have many Nash equilibria.

3.2 Examples of Nash Equilibrium

3.2.1 The Prisoner’s Dilemma

By examining the four possible pairs of actions in the Prisoner’s Dilemma we see that (F ink, F ink) is
the unique Nash equilibrium. Let’s see how.
Players: The two suspects.
Actions: Each player’s set of actions is {Quiet, Fink}.
Preferences: Each suspects’ preferences are given below:

Suspect 1’s Preferences Suspect 2’s Preferences

1. (Fink, Quiet) 1. (Quiet, Fink)
2. (Quiet, Quiet) 2. (Quiet, Quiet)
3. (Fink, Fink) 3. (Fink, Fink)
4. (Quiet, Fink) 4. (Fink, Quiet)

Assigning appropriate payoffs that represent their preferences, we obtain the following payoff matrix:

Suspect 2
Quiet F ink
Quiet 2, 2 0, 3
Suspect 1
F ink 3, 0 1, 1

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Dr. Rupali Sharma Chapter 3. Nash Equilibrium

Table 3.1: (Figure 26.1)

For an action profile a∗ to be a Nash Equilibrium, equation 3.1 must be satisfied. That is,

ui (a∗ ) ≥ ui (ai , a∗−i ) for every action ai of player i.

Suppose that suspect 2 chooses Fink and suspect 1 has to do decide her best move. Looking down the
second column, it is evident that that suspect 1 is better off choosing Fink than Quiet as Fink yields
suspect 1 a payoff of 1 whereas Quiet yields her a payoff of 0.

Suspect 2
↓
Quiet F ink
Quiet 2, 2 0, 3
Suspect 1
F ink 3, 0 1, 1 

If suspect 2 chooses to stay Quiet, looking down the first column, it is evident that that suspect 1 is
better off choosing Fink than Quiet as Fink yields suspect 1 a payoff of 3 whereas Quiet yields her a
payoff of 2.

Suspect 2
↓
Quiet F ink
Quiet 2, 2 0, 3
Suspect 1
 F ink 3, 0 1, 1

To show that a pair of actions is not a Nash equilibrium, it is not necessary to study both player’s
decisions. It is enough to show that one player wishes to deviate to show that a pair of actions is not a
Nash equilibrium. However, for the sake of completeness, let’s examine suspect 2’s decision process.
Similarly, given that suspect 1 chooses Fink, suspect 2 is better off choosing Fink than Quiet as Fink
yields her a payoff of 1 whereas Quiet yields her a payoff of 0.

Suspect 2

Quiet F ink
→ Quiet 2, 2 0, 3
Suspect 1
→ F ink 3, 0 1, 1


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Chapter 3. Nash Equilibrium Game Theory and Strategic Interactions

Since no other action profile satisifies equation 3.1, no other action profile is a Nash equilibrium. In
summary, in the only Nash equilibrium of the Prisoner’s Dilemma both players choose Fink. I In
particular, the incentive to free ride eliminates the possibility that the mutually desirable outcome
(Quiet, Quiet) occurs. Both players get a higher payoff in (Quiet, Quiet) in comparison to (F ink, F ink)
but (Quiet, Quiet) is unstable because players have the incentive to deviate. Hence the only stable
equilibrium is where neither of the players have an incentive to deviate which leaves us with (F ink, F ink)
as the only Nash equilibrium.
In the other situations discussed before that may be modeled as the Prisoner’s Dilemma, the outcomes
predicted by the notion of Nash equilibrium are thus as follows: both people goof off when working
on a joint project; both duopolists charge a low price; both countries build bombs; both farmers graze
their sheep a lot. (The overgrazing of a common thus predicted is sometimes called the “tragedy of the
commons”.)

3.2.2 BoS
To find the Nash equilibria of BoS, let’s examine each pair of actions and see if any player has an incentive
to deviate from that outcome. The game is represented by the following matrix:

Player 2
Bach Stravinsky
Bach 2, 1 0, 0
Player 1
Stravinsky 0, 0 1, 2

To show that a pair is not a Nash equilibrium, it suffices to show that one player can increase her payoff
by deviating. However, to understand each players incentives and decisions, we evaluate the incentive to
deviate for both players.

Is there an incentive to deviate?

Outcome Player 1 Player 2
No No
(Bach, Bach)
A deviation to Stravinksy (for either player) reduces their payoffs to 0.
Yes Yes
(Bach, Stravinsky)
A deviation to Stravinksy & Bach respectively increases their payoffs to 1.
Yes Yes
(Stravinsky, Bach)
A deviation to Bach & Stravinksy respectively increases their payoffs to 1.
No No
(Stravinsky, Stravinsky)
A deviation to Bach (for either player) reduces their payoffs to 0.

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