Question 25
Consider two cigarette companies, PM Inc. and Brown Inc. If neither company advertises, the two companies split the market and earn $60 million each. If they both advertise, they again split the market, but profits are lower by $20 million since each company must bear the cost of advertising. Yet, if one company advertises while the other does not, the one that advertises attracts customers from the other. In this case, the company that advertises earns $70 million while the company that does not advertise earns only $30 million. What will these two companies do if they behave as individual profit maximizers?
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Both companies will advertise. Brown Inc. earns $40. |
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Neither company will advertise. Brown Inc. earns $60. |
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Both companies will advertise. PM Inc. earns $60. |
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One company will advertise, and the other will not. Brown Inc. earns $70. |
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