Suppose that Expresso and Beantown are the only two firms that sell coffee. The

Question

Suppose that Expresso and Beantown are the only two firms that sell coffee. The following payoff matrix shows the profit (in millions of dollars) each company will earn depending on whether or not it advertises: For example, the upper right cell shows that if Expresso advertises and Beantown doesn't advertise, Expresso will make a profit of $18 million, and Beantown will make a profit of $2 million. Assume this is a simultaneous game and that Expresso and Beantown are both profit-maximizing firms. If Expresso decides to advertise, it will earn a profit of Smillion if Beantown advertises and a profit of million if Beantown does not advertise. If Expresso decides not to advertise, it will earn a profit of S million if Beantown advertises and a profit of $ million if Beantown does not advertise. If Beantown advertises, Expresso makes a higher profit if it chooses If Beantown doesn't advertise, Expresso makes a higher profit if it chooses Suppose that both firms start off not advertising. If the firms act independently, what strategies will they end up choosing? Expresso will choose not to advertise and Beantown will choose to advertise. Both firms will choose to advertise. Expresso will choose to advertise and Beantown will choose not to advertise. Both firms will choose not to advertise. Again, suppose that both firms start off not advertising. If the firms decide to collude, what strategies will they end up choosing? Expresso will choose to advertise and Beantown will choose not to advertise. Both firms will choose to advertise. Expresso will choose not to advertise and Beantown will choose to advertise. Both firms will choose not to advertise.

Explanation / Answer

if expresso decides to advertise, it will earn a profit of $ 10 million if beantown advertises and a profit of $ 18 million if beantown doesn't advertise.

if expresso decides not to advertise, it will earn a profit of $ 2 million if beantown advertises and a profit of $ 11 million if beantown doesn't advertise.

if beantown advertises, expresso makes higher profit if it chosses to advertise

if beantown doen't advertises, expresso makes higher profit if it chosses to advertise

if firms act independently

b) both firms will choose to advertise

both firms will indepndently choose to advertise as whatever the decision of other, they will be better off if they choose to advertise

if firms decise to collude

d)both firms will choose not to advertise

if they collude , they know option of both choosing not to advertise (11,11) will better position that option of both choosing to advertise(10,10)

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