ACCA Advanced Performance Management (APM) Practice Exam 2026 - Free APM Practice Questions and Study Guide

Nash equilibrium is a fundamental concept in game theory where each player (in this case, firms A and B) selects their best strategy based on the strategy chosen by the other player. This means that neither firm can benefit by changing their strategy while the other's strategy remains the same. In simpler terms, each firm is doing the best they can, taking into account the actions of the other.

For firms to be in Nash equilibrium, it is critical that both have selected strategies that are optimal given the choices made by the other firm. This mutual optimization suggests a stable situation where no single firm has an incentive to deviate from their chosen strategy because doing so would not lead to a better outcome for them. This principle emphasizes the interdependence of firms' decision-making processes, which is central to determining Nash equilibrium.

In contrast, acting independently does not necessarily lead to Nash equilibrium since firms may not consider the impact of their decisions on each other. Competing on price or cooperating to set high prices can lead to various outcomes but do not inherently define Nash equilibrium unless those choices result in optimal strategies given the other firm's actions.