2. Each firm knows the strategies available to it and to its rival.

3. Each firm knows with certainty the pay-offs— total revenue,

total costs, and total profits from each combination of
strategies.
4. The actions taken by duopolists do not affect the total size of
the market.
5. Each firm chooses its strategy expecting the worst from its
rival. It means that each firm acts in the most conservative
way, expecting that the rival will choose the best possible
counter- strategy open to him. This behaviour is called rational.
6. In the zero sum game, there is no possibility of collusion. Each
firm wants to maximise its market share. It means that the aims
of the firm are opposed to each other.

2.4 GAME THEORY: NASH EQUILIBRIUM:

Simple dominant strategy games

The simplest case is where there are just two firms with
identical costs, products and demand. They are both considering
which of two alternative prices to charge. Figure 2.3 shows typical
profits they could each make.

Let us assume that at present both firms (X and Y) are

charging a price of £2 and that they are each making a profit of
£10 million, giving a total industry profit of £20 million. This is
shown in the top left-hand box (A).

Now assume they are both (independently) considering

reducing their price to £1.80. In making this decision, they will
need to take into account what their rival might do, and how this
will affect them. Let us consider X's position. In our simple
example there are just two things that its rival, firm Y, might do.
Either Y could cut its price to £1.80, or it could leave its price at
£2. What should X do?. One alternative is to go for the cautious
approach and think of the worst thing that its rival could do. If X
kept its price at £2, the worst thing for X would be if its rival Y cut
its price. This is shown by box C: X's profit falls to £5 million.