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Post on “How John Nash made modern economics possible”

The article I chose for this blog post is  It mainly discusses different applications of Nash’s non-cooprateitve solutions to game theory and how it can relate to modern economics. The article also talks about Prisoner’s dilemma and the kicker/goalie example we have looked at in lecture. Nash first introduced the idea of bargain equilibrium when he wrote a term paper in his undergraduate economics class.  He proposed three assumptions: First, the bargaining outcome should not be affected by affine transformations of a utility function. Second, the outcome should be Pareto optimal. Third, players should be treated symmetrically. The article continues to talk about Nash equilibrium bargaining if outside options existed and how that will change the game between two people bargaining for equal payoff. Nash bargaining outcome only exists if both parties have the same bargaining power.

This article is related to what we have learned in class. During lecture, we first introduced the idea of Nash Equilibrium in game theory: Suppose Player 1 chooses a strategy s and Player 2 chooses a strategy T, the pair (s,t) is a Nash Equilibrium if s and t are best response to each other. Later in the course when we started talking about bargaining strategy, Nash Bargaining Outcome was introduced. When two nodes A and B are bargaining for payoffs, Nash Bargaining solution exists only if A and B have equal bargaining power. In order for two parties to have equal power, A and B need to split the surplus. The surplus is calculated by subtracting both outside options to the total amount. In class, we also extended this idea and talked about balanced outcome.  A balanced outcome is an outcome (consisting of a matching and node values) is balanced if, for each edge in the matching, the split of the money represents the Nash Bargaining Outcome for the two nodes involved given the best outside options for each node provided by the values in the rest of the network. The above discussion shows that what we have learned in class about Nash equilibrium is related to the article “How John Nash made modern economics possible”.


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