Subgame perfection
Also known as: Subgame-perfect equilibrium
An equilibrium that stays rational at every point, ruling out empty threats.
What it means
A refinement of Nash equilibrium for sequential games requiring that players' strategies form a Nash equilibrium in every subgame, not just at the start. Its purpose is to eliminate equilibria sustained by non-credible threats — promises a player would not actually carry out when the moment arrived. Subgame-perfect equilibria are found by backward induction, ensuring rationality holds even off the expected path of play. It matters because it sharpens predictions in bargaining, entry deterrence, and repeated interaction by insisting that every threat and promise be credible in the sense that executing it is itself optimal.
Examples
A monopolist's threat to flood the market and bankrupt an entrant is not subgame-perfect if, once entry happens, fighting would only hurt the monopolist.
A parent threatens to turn the car around and cancel the holiday. The child ignores it, correctly: once the moment came, nobody would actually give up the week away.
A union's threat to strike for six months is credible only if members would genuinely choose to lose six months' pay when the day arrives — otherwise management can call it.
First described in Reinhard Selten (1965).