HELP! 4. Given the payoff matrix (shown below) for a duopoly, consisting of Firm
ID: 1114996 • Letter: H
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HELP!
4. Given the payoff matrix (shown below) for a duopoly, consisting of Firm A and Firm B, in which each firm is considering an expanded advertising campaign, answer the following questions (all figures in the payoff matrix give changes in annual profits in millions of dollars) a. Does Firm A have a dominant strategy? b. Does Firm B have a dominant strategy? c. Is there a dominant strategy equilibrium? Explain Firm B Expand advertising No change in advertising Firm B: Firm B: Expand advertising Firm A: Firm A Firm B: Firm B No change in advertising Firm A: Firm A:Explanation / Answer
1.
a. Keeping Firm B's action constant, it is always better for Firm A to expand (1>-3, 4>0). Hence the dominant strategy for A is to Expand Advertising.
b. Keeping Firm A's action constant, it is always better for Firm B to expand (3>-5, 5>0). Hence the dominant strategy for B is to Expand Advertising.
c. The dominant strategy equilbrium is if both expands advertising. For A and B to move to not advertisng gives less payoffs than advertising.
5. a. Concentration ratio is indicative of the size of the firm with respect to its industry. A high concentration, i.e, closer to 100% means less competition among firms. So in this case it is high, 75%. This means that the firms are close to a monopoly situation. Actually it can be considered an oligopoly.
b.A higher HHI is more competitive industry with a lot of firms. Hence the 425 industry is more competitive.
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