In a small town, two coffee shops, A and B, are deciding on their pricing strategy. If both shops price their coffee at $3, they will attract a large number of customers, but if one lowers their price to $2, they will attract even more customers, while the other shop suffers a loss. If both shops stick with the $3 price, what can we infer about their pricing strategies in terms of Nash Equilibrium?

In the situation with the two coffee shops, we can think of Nash Equilibrium as a point where neither shop wants to change their pricing strategy because doing so would not benefit them. If both shops choose to price their coffee at $3, they are both making a reasonable profit and attracting customers, but they are also aware that if one lowers the price to $2, they could gain more customers at the other shop's expense. However, if one shop lowers their price while the other keeps it at $3, the shop with the lower price will gain more customers, leading to a loss for the other. In this case, sticking with the $3 price is stable because neither shop has an incentive to change, as switching would only hurt them. This mutual decision to stay at $3, despite the potential for higher profits at a lower price, illustrates the concept of Nash Equilibrium where both players are making the best decision they can, given the choice of the other.