📚 Learning Guide
Nash Equilibrium and Strategy Adjustments
hard

In a competitive market, Gary's Gym and eFitness have reached a Nash equilibrium where Gary's Gym lowers its prices while eFitness increases its advertising. If eFitness decides to decrease its advertising budget without consulting Gary's Gym, which of the following outcomes best reflects the concept of Nash equilibrium in this scenario?

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Choose the Best Answer

A

Gary's Gym will benefit from eFitness's reduced advertising, as this will likely increase its customer base.

B

Both Gary's Gym and eFitness will have the incentive to change their strategies, leading to a new equilibrium.

C

Gary's Gym will have no incentive to change its pricing strategy, even if eFitness changes its advertising budget.

D

The market will shift entirely to a new competitor, rendering both gyms unprofitable.

Understanding the Answer

Let's break down why this is correct

Answer

In a Nash equilibrium, each player in a competitive market makes the best decision they can, considering the decisions of their competitors. In this case, Gary's Gym has lowered its prices, and eFitness has responded by increasing its advertising. If eFitness decides to decrease its advertising budget without consulting Gary's Gym, it may affect their competitive position. Since Gary's Gym has already adjusted its strategy based on eFitness's previous decision, eFitness's new move could lead to a situation where both gyms are no longer optimizing their strategies. Therefore, the outcome may not reflect a Nash equilibrium anymore because eFitness's unilateral change could create an opportunity for Gary's Gym to adjust its prices again, leading to a new equilibrium.

Detailed Explanation

Gary's Gym won't change its prices just because eFitness changes its ads. Other options are incorrect because This suggests that eFitness's ads directly help Gary's Gym; This implies both gyms will want to change their plans.

Key Concepts

Nash Equilibrium
Strategic Interactions in Oligopoly
Game Theory
Topic

Nash Equilibrium and Strategy Adjustments

Difficulty

hard level question

Cognitive Level

understand

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