Impacts of fairness, engineers’ evaluations, and penalty of product failure in multi-equilibria non-cooperative design

Abstract

This article compares Nash equilibrium and fairness equilibrium of a non-cooperative design problem in which multiple equilibria exist. Nash equilibrium is widely used to study design decisions in non-cooperative design; however, when multiple equilibria exist, behavioral research has found that actual human decisions are not always consistent with Nash equilibrium. Fairness equilibrium has been proposed as a modification to Nash equilibrium by incorporating assessments of fairness in utility functions and has successfully explained why decisions that are not Nash equilibrium may occur. This article studies how engineers’ decisions and design outcomes in fairness equilibrium differ from those in Nash equilibrium. This article illustrates how fairness equilibrium changes with fairness, engineers’ evaluations, and penalty of product failure.