This is a simultaneous move game: Two discount stores (Walmart and Target) are i

Question

This is a simultaneous move game: Two discount stores (Walmart and Target) are interested in expanding their market share through advertising. The table below depicts the profits of both stores with and without advertising:

a.       What is the optimal strategy for each player? Why?

b.       What is the equilibrium payoff for the stores? Why?

c.       Should these firm cooperate (if it was legal to do so)? Why?

Explanation / Answer

a) The optimal strategy for both the firm is to advertise. If one firm is not advertising and other is then the firm not advertising is facing a loss or their return is considerably lower.

b) The equilibrium payoff for the stores is $190 and $160 because both the firms want a better profit and they both will advertise. This will cost some money but the benefit when both are advertising is not much.

c) yes, if they are cooperating then, in that case, they will not advertise at all and end up having more return than what they were having when they were advertising.

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