Question 8 Based on the discussion in Box 8.4 (page 188), set up a prisoner\'s d

Question

Question 8 Based on the discussion in Box 8.4 (page 188), set up a prisoner's dilemma type matrix to illustrate a situation in which two firms' profits are determined by their advertising expenditure. Work on the assumption that: (a) if neither firm advertises they will both enjoy medium level profits (payoffs); (b) if one firm advertises and the other does not, the overall payoff for the former (in terms of profits) will be high while the payoff for the latter will be zero; (c) if both firms choose to advertise they will both end up in an advertising war after which they both earn low pay-offs.

Explanation / Answer

Following would be prisoner dilemma type Matrix:

Above Matrix shows that both firms can increase profits by cooperating but due to trust deficit both tend to cheat each other and land up at lesser profits level.

B A No. Ads    10, 10 0, 15 Ads 15, 0 5, 5

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