The Candle Corporation and the Wick Company are the only producers of a very sophisticated type of flammable material. They each can engage in either a high or low level of advertising in trade journals. The payoff matrix is as follows:
Low Level High Level
Corp. Low Level Wick - $13 million Wick - $12 million
Candle - $12 million Candle - $11 million
High Level Wick - $12 million Wick - $11 million
Candle - $13 million Candle - $12 million
a. Will Candle engage in a high or a low level of advertising in trade journals?
b. Will Wick engage in a high or a low level of advertising in trade journals?
c. Is there a dominant strategy for each firm?
To solve through this type of question you begin by seeing if each player has a dominant strategy.
First, suppose Wick chooses Low...it follows that Candle Corps Best response is to ...
Given a payoff matrix this solution shows how to solve through and determine if each firm has a dominant strategy and what that strategy is.