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Game theory and Nash equilibrium

Nash equilibrium

If you haven't watched the movie "A Beautiful Mind", you should. It is about John Nash (played by Russell Crowe) who won the Nobel Prize in economics for his foundational contributions to game theory. This is what this tutorial is about. Nash put some structure around how players in a "game" can optimize their outcomes (if the movie is to be fully believed, this insight struck him when he realize that if all his friends hit on the most pretty girl, he should hit on the second-most pretty one). In this tutorial, we use the classic "prisoner's dilemma" to highlight this concept.

Why parties in a cartel will cheat

You know what Nash equilibrium is (from the other tutorial). Now we apply it to a scenario that is fairly realistic--parties to a cartel cheating. A cartel is a group of actors that agree (sometimes illegally) to coordinate their production/pricing to maximize their collective economic profit. What we will see, however, is that this is not a "Pareto optimal" state and they will soon start producing more than agreed on.