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Trigger Strategies and Collusive Level of Advertising

At a time when demand for ready-to-eat cereal was stagnant, a spokesperson for the cereal maker Kellogg's was quoted as saying, " . . . for the past several years, our individual company growth has come out of the other fellow's hide." Kellogg's has been producing cereal since 1906 and continues to implement strategies that make it a leader in the cereal industry. Suppose that when Kellogg's and its largest rival advertise, each company earns $3 billion in profits. When neither company advertises, each company earns profits of $15 billion.

If one company advertises and the other does not, the company that advertises earns $54 billion and the company that does not advertise loses $3 billion. For what range of interest rates could these firms use trigger strategies to support the collusive level of advertising?

Instruction: Enter your answer as a percentage rounded to the nearest whole number

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Solution Preview

To find the Nash equilibrium, we determine whether a firm can increase its profits by choosing a different action, given the actions of the other firm. In this case we can see that with both firms advertising, neither firm can increase their payoffs by not advertising. If neither ...

Solution Summary

This solution explains how rival companies use a trigger strategy to initiate collusion in advertising. It discusses the Nash equilibrium, profit, interest rate and the percentage rounded to nearest whole number.