Dominick Salvatore Schaums Outline of Microeconomics, 4th edition Schaums Outline Series 2006

282 GAME THEORY AND OLIGOPOLISTIC BEHAVIOR [CHAP. 12
12.20 (a) How is a strategic move differentiated from a Nash equilibrium? (b) What is a credible threat? When
is a threat not credible? (c) What is the greatest difficulty in deciding and implementing a business
strategy on the part of the firm?
(a)
(b)
(c)
A Nash equilibrium refers to the situation when each player is adopting the best strategy, given what the other
player is doing. On the other hand, a strategic move refers to a player’s strategy of constraining his own
behavior to make a threat credible so as to gain a competitive advantage. This means even accepting
lower profits, which is not a Nash equilibrium.
A threat is credible if it is believed. This occurs if the threat is backed by a commitment that the rival player
believes the firm making the threat will carry out even if at the cost of lower profits.
Most real-world business decisions are made in the face of risk or uncertainty. Specifically, a firms often
does not know the exact payoff or outcome of the strategic moves open to it and this greatly complicates
the development and conduct of a business strategy by the firm.