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Prisoner's Dilemma

Firm M and N compete for a market and decide independently how much to advertise. Each can spend either $10 million or $20 million on advertising. If the firms spend equal amounts, they split the $120 million market equally. (for instance, if both choose to spend $20, each firm's net profit is 60-20=$40 million.) If one firm spends $20 million and other $10 million, the former claims two-thirds of the market and the latter one third.
Firm N's Advertising
10 million 20 million
Firm M's Advertising 10 million ?,? ?,?
20 million ?,? 40,40
A)Fill in the profit entries in the payoff table.
B)If the firms act independently, what advertising level should each choose? Explain. Is a prisoner's dilemma present?
C)Could the firms profit by entering into an industry-wide agreement concerning the extend of advertising? Explain.

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(A)
Firm N's Advertising
10M 20M
Firm M's Advertising 10M ...

Solution Summary

The solution clearly explains the Prisoner's Dilemma as it pertains to this problem. The solution is brief yet very easy to understand. The solution also talks about profits and if a cartel could be formed. Overall, an excellent response.

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