Suppose two cell phone providers (Horizon and Runfast) are trying to decide whet

Question

Suppose two cell phone providers (Horizon and Runfast) are trying to decide whether to advertise. The firms may each either advertise or not advertise. The corresponding payoffs (in millions of S) from each of the four possible outcomes are shown in the payoff matrix below. In this model, advertising costs money but it only takes customers from rival providers a) First, what are the primary characteristics of oligopolies? b) Do the cell phone providers have dominant strategies? If so, what are they? c) What is the Nash equilibrium? Runfast (R) Do Not Advertise Advertise Horizon (H) Horizon Do Not Advertise H=0 Advertise

Explanation / Answer

a)The primary characteristics of oligopolies include: 1) There are barriers to entry preventing competition. 2) There is considerable product differentiation. 3) A few firms occupy a large portion of market share. 4) All firms pursue profit maximization and there can be supernormal profits in the long run and in the short run.

b) There are dominant strategies for both players in this game. These are Advertise for Horizon as 4>3 and 1>0. The dominant strategy for Runfast is also to Advertise as we have 4>3 and 1>0.

c) The Nash Equilibrium is where both firms advertise. Thus (Advertise,Advertise) is a Nash equilibrium with payoffs of (1,1) respectively.

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