a. Two competing firms, A and B, sell similar products and must each decide whether they should pay for an expensive advertising campaign. The two firms know that if neither firm advertises, they both can maintain their existing market share, in which case each firm makes $1OM per month in profits. If one firm advertises while its competitor does not, the firm that advertises wins a lot of customers and its profits rise to $13M per month, while the profits of its competitor (that does not advertise) fall to $6M. If both firms advertise, the profit of each is $9M. Assume that each firm makes its decision without knowing what the other firm will do. i. Assume that each firm seeks to maximise its profits. Draw the pay-off matrix. ii. Find all Nash equilibria of this game (if there are any) and comment on the results.

a. Two competing firms, A and B, sell similar products and must each decide whether they should pay for an expensive advertising campaign. The two firms know that if neither firm advertises, they both can maintain their existing market share, in which case each firm makes $1OM per month in profits. If one firm advertises while its competitor does not, the firm that advertises wins a lot of customers and its profits rise to $13M per month, while the profits of its competitor (that does not advertise) fall to $6M. If both firms advertise, the profit of each is $9M. Assume that each firm makes its decision without knowing what the other firm will do. i. Assume that each firm seeks to maximise its profits. Draw the pay-off matrix. ii. Find all Nash equilibria of this game (if there are any) and comment on the results.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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