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Asymmetric Information in Game Theory

1.
a. You and a competing firm are the only sellers of a new product. You are engaged in an intense battle for initial market share. You both realize that the one who captures most of the market share will be the one who spends the most on advertising and promotion. You are the marketing manager and you have up to $1 million for advertising and promotion for all your products. You have to decide how much of your budget you should allocate to the marketing of the new product. Construct a payoff matrix similar to the one shown in Figure 11.3. Notice in Figure 11.3 that the price is the variable designated as being "high" or "low." What variable would you use in this example? The numbers in Figure 11.3 represent potential revenue. What might they represent in this example?

b. What challenges do you think there are in using this type of analysis in an actual business situation?

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a)
>Construct a payoff matrix similar to the one shown in Figure 11.3.
See the attached file.

>Notice in Figure 11.3 that the price is the variable designated as being "high" or "low." What variable would you use in this example?
The portion of the $1 million advertising budget that ...

Solution Summary

This solution uses game theory to analyze the marketing decisions faced by two competitors, and explains the challenge that asymmetric information could pose to the game's long-run equilibrium.

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