Firm A and Firm B operate retail malls. Both are trying to determine whether to
ID: 1120100 • Letter: F
Question
Firm A and Firm B operate retail malls. Both are trying to determine whether to increase advertising budgets during the holiday season or to keep them constant. Because of contract cycles, Firm A will have to make a commitment regarding an advertising budget before Firm B. Their alternatives and payoffs are displayed in the decision tree diagram. Use this information to determine each firm's optimal strategy and anticipated payoff.
Firm A Firm B Increase RIncrease Constant 2 6 4 Constant Increase 2 ConstantExplanation / Answer
As per the decision tree given above, if the firm A chooses to keep his advertisement budget constant irrelevant or what firm B does his return will be 1 if firm B also keeps his budget constant and 4 if firm B increases his budget. On the other hand, if Firm A increases the budget his return will increase to 2 if B keeps his budget constant and his return will be 5 if B also flows him and increases his own budget.
The return values for Firm A is more (5,2) as compared to (4,1) if he increases his advertisement budget. So, the optimum decision for Firm A is to increase his Advertisement budget.
The Return value for Firm B if Firm a decides to increase his budget is 6 if he keeps his budget constant and only 5 if he also increases his budget. In such scenario firm B will be better off if he keeps his Budget constant when firm A increases his budget.
Conclusion: The Optimal strategy for firm A is to increase his budget and get a return of 2 and firm B is to keep his budget constant and get a return of 6. So its Increase, Constant (2,6).
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