A country’s market for new motor vehicles is dominated completely by two firms, Fastcars Ltd and Slowcars Ltd. Market revenue is fixed at $10 billion. Each firm can choose whether to advertise. Advertising costs $1 billion for each firm that advertises. If one firm advertises and the other does not, then the firm that advertises receives 100% of market revenue and pays for its advertising. If both firms advertise, they split the market revenue 50:50 and pay for their respective advertising. If neither advertises, they split the market revenue 50:50 but without the expense of advertising. a) What strategy would you advise that Fastcars Ltd should follow? b) What would you predict will be the strategy chosen by each firm? c) Is there an outcome that would make both firms better off? In case you find that there is such an outcome, is it achievable?
A country’s market for new motor vehicles is dominated completely by two firms,
Fastcars Ltd and Slowcars Ltd. Market revenue is fixed at $10 billion. Each firm can
choose whether to advertise. Advertising costs $1 billion for each firm that advertises.
If one firm advertises and the other does not, then the firm that advertises receives
100% of market revenue and pays for its advertising. If both firms advertise, they split
the market revenue 50:50 and pay for their respective advertising. If neither advertises,
they split the market revenue 50:50 but without the expense of advertising.
a) What strategy would you advise that Fastcars Ltd should follow?
b) What would you predict will be the strategy chosen by each firm?
c) Is there an outcome that would make both firms better off? In case you find that
there is such an outcome, is it achievable?
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