Your firm competes against another firm for customers. You and your rival know your products will be obsolete at the end of the year and must simultaneously determine whether or not to advertise. In your industry, advertising does not increase total industry demand but instead induces consumers to switch among the products of different firms. Thus, if both you and your rival advertise, the two advertising campaigns will simply offset each other, and you will each earn P5 million in profits. If neither of you advertises, you will each earn P10 million in profits. However, if one of you advertises and the other one does not, the firm that advertises will earn P20 million and the firm that does not advertise will earn P1 million in profits. Is your profit-maximizing choice to advertise or not to advertise? How much money do you expect to earn? a. Construct the payoff-matrix listing the profit they will earn if they advertise or not. b. Determine the (Nash) equilibrium (or equilibria) of the game. Explain. c. What arrangement might induce one of the firms to willingly accept not to advertise?
Your firm competes against another firm for customers. You and your rival know your products will be obsolete at the end of the year and must simultaneously determine whether or not to advertise. In your industry, advertising does not increase total industry demand but instead induces consumers to switch among the products of different firms. Thus, if both you and your rival advertise, the two advertising campaigns will simply offset each other, and you will each earn P5 million in profits. If neither of you advertises, you will each earn P10 million in profits. However, if one of you advertises and the other one does not, the firm that advertises will earn P20 million and the firm that does not advertise will earn P1 million in profits. Is your profit-maximizing choice to advertise or not to advertise? How much money do you expect to earn?
a. Construct the payoff-matrix listing the profit they will earn if they advertise or not.
b. Determine the (Nash) equilibrium (or equilibria) of the game. Explain.
c. What arrangement might induce one of the firms to willingly accept not to advertise?
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