[The soft drink industry is dominated by two cola firms- DEW and HEW. The market is worth $8 billion. Each firm can decide whether to advertise or not, but advertising costs $2 billion to any firm undertaking it. Moreover, advertising will create only negligible new demand as the market is already saturated. So, for the purpose of this question, assume that the market remains at $8 billion regardless of advertising. If one firm advertises and the other does not, then the former captures the whole market. If both firms advertise, then DEW captures 60% of the market and HEW captures 40% of the market, but the advertising must be paid for. If neither firm advertises, then the market is again split 60:40, with 60% going to DEW and 40% to HEW.] [Draw the payoff matrix for this game where each player’s payoff is equal to the value of market it captures less the cost of advertisement. [Do any of the firms have dominant strategies? If so, what are they? Is there a dominant strategy equilibrium? If so, what is it? Is there any Nash Equilibrium (equilibria) in this game? If so, what is that? [The dental lobby campaigns to ban soft drink advertising because of adverse effects of these drinks on dental hygiene. How much should DEW and HEW spend in defeating such lobbying moves? Explain in 2-3 sentences. (Hint: Use the pay-off matrix from part a to determine your answer).

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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[The soft drink industry is dominated by two cola firms- DEW and HEW. The market is worth $8 billion. Each firm can decide whether to advertise or not, but advertising costs $2 billion to any firm undertaking it. Moreover, advertising will create only negligible new demand as the market is already saturated. So, for the purpose of this question, assume that the market remains at $8 billion regardless of advertising.

If one firm advertises and the other does not, then the former captures the whole market. If both firms advertise, then DEW captures 60% of the market and HEW captures 40% of the market, but the advertising must be paid for. If neither firm advertises, then the market is again split 60:40, with 60% going to DEW and 40% to HEW.]

[Draw the payoff matrix for this game where each player’s payoff is equal to the value of market it captures less the cost of advertisement.
[Do any of the firms have dominant strategies? If so, what are they? Is there a dominant strategy equilibrium? If so, what is it? Is there any Nash Equilibrium (equilibria) in this game? If so, what is that?
[The dental lobby campaigns to ban soft drink advertising because of adverse effects of these drinks on dental hygiene. How much should DEW and HEW spend in defeating such lobbying moves? Explain in 2-3 sentences. (Hint: Use the pay-off matrix from part a to determine your answer).

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Please specify how to caculate the pay off matrix. Why the pay off matrix is in unit.

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