some games, there are multiple Nash equilibria, but not all of them are realistic. In dynamic games, backward induction can be used to eliminate unrealistic Nash equilibria. Backward induction assumes that players are rational and will make the best decisions based on their future expectations. This eliminates noncredible threats, which are threats that a player would not carry out if they were ever called upon to do so.

For example, consider a dynamic game with an incumbent firm and a potential entrant to the industry. The incumbent