The two leading Us Manufacturers of high performance radial tires must set their

Question

The two leading Us Manufacturers of high performance radial tires must set their advertising strategies for the coming year. Each firm has two strategies avaliable: maintain current advertising or increase advertising by 15%. The strategies available to the firms, A and B, are presented in the payoff matrix below.

Firm B

.........................................Increase Adv........Maintain Adv

Firm A, Increase Adv. 27,27.......................50,12

Maintain Adv. 12,50........................45,45

Explain the strategy that should be used by each firm. Support your choce by including numbers.

Explanation / Answer

Hi,

Please find the answer as follows:

The strategy to increase the advertising level in the given case is a "Dominant Strategy". It is because each firm gains something from increased advertising irrespective of the action initiated by its rival firm. In the given case, when firm B increases advertising, firm A would earn 27 by increasing advertising while it would continue to earn 12 if advertising is not increased. Therefore, it is quite evident that firm A is better off by increasing. Another example would be, if firm B doesn't increase the advertising, firm A earns 45 by maintain same advertising while it can earn 50 by increasing, which indicated that firm A is again better off by increasing.

Thanks.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.