3 Is there anything that firms can do to change the equilibrium to a more
favourable one, meaning to ensure co-operation?
These issues are addressed in the following subsections.
Equilibrium
In order to determine strategy or an equilibrium situation, we must first
assume that the players are rational utility maximizers. We can now consider
three types of equilibrium and appropriate strategies in situations involving
different payoffs. These are dominant strategy equilibrium, iterated dominant
strategy equilibrium, and Nash equilibrium. It is important to consider these
equilibria in this order, as will be seen.
a. Dominant strategy equilibrium