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.
Firm N's Advertising
Firm M's Advertising 10M ...
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.
The Prisoner's Dilemma and the Nash Equilibrium
Explain the Prisoner's Dilemma game, the notion of dominant strategy, and the concept of Nash equilibrium and cooperation. Using these concepts, then, analyze the following duopoly game.
Philip Morris and R.J. Reynolds spend huge sums of money each year to advertise their tobacco products in an attempt to steal customers from each other. Suppose each year Philip Morris and R.J. Reynolds have to decide whether or not they want to spend money on advertising. If neither firm advertises, each will earn a profit of $2 million. If they both advertise, each will earn a profit of $1.5 million. If one firm advertises and the other does not, the firm that advertises will earn a profit of $2.8 million and the other firm will earn $1 million.
• If the two companies decide to collude to maximize profits, what will each company do? What profit will each company earn?
• What is the dominant strategy for each company, and what profit will each company earn if they follow those strategies?
• Is the solution you found in the first question a Nash equilibrium?
• Is the solution you found in the second question a Nash equilibrium?
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