The soft drink industry is dominated by TCCC and PSC. The market is worth $6 billion. Each firm can decide whether to advertise, but advertising costs $1 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 $6 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 TCCC captures 60% of the market and PSC 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 TCCC and 40% to PSC. 1. 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. 2. 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? Provide brief and to the point answer. Extra writing will not gain more marks. 3. The dental lobby campaigns to ban soft drink advertising because of adverse effects of these drinks on dental hygiene. How much should TCCC and PSC spend in lobbying efforts to defeat such moves to introduce a ban? Explain your answer in 100 words or less. (Hint: Use the pay-off matrix from part a to determine your answer)
The soft drink industry is dominated by TCCC and PSC. The market is worth $6 billion. Each firm can decide whether to advertise, but advertising costs $1 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 $6 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 TCCC captures 60% of the market and PSC 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 TCCC and 40% to PSC.
1. 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.
2. 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? Provide brief and to the point answer. Extra writing will not gain more marks.
3. The dental lobby campaigns to ban soft drink advertising because of adverse effects of these drinks on dental hygiene. How much should TCCC and PSC spend in lobbying efforts to defeat such moves to introduce a ban? Explain your answer in 100 words or less. (Hint: Use the pay-off matrix from part a to determine your answer)
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