English to French Bus/Financial Economics

As Kierkegaard noted,8 although life is lived forwards it is understood backwards. The same is true in economic models of competition as it is in reality. Firms are assumed to be forward-looking, and once they understand the “end game,” they “solve backwards.” For any given pair of capacities chosen by the firms, it is possible to compute the profit maximizing prices that they will unilaterally choose. However, just as the equilibrium prices at the final stage will be an equilibrium according to the game theoretical equilibrium concept of Nash equilibrium,9 so too at stage 1 the firms will set a Nash equilibrium in capacities, **taken as given how stage 2 will solve ** for any pair of capacities that they choose. Mathematically, these games are solved by concepts of “backward induction” and “subgame perfect equilibrium.”

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