Consider two strategically dependent firms and their decision to advertise. If b

Question

Consider two strategically dependent firms and their decision to advertise. If both firms advertise, Firm A makes $20 mil in profits and Firm B makes $40 mil; if neither advertise, Firm A makes $6 mil and Firm B makes $18 mil; if Firm A advertises and Firm B does not, Firm A earns $30 mil and Firm B earns $6; and if Firm A does not advertise and Firm B does, Firm A earns $12 mil and Firm B earns $24 mil. Determine and report the pay-off matrix for this game. Then determine if each firm has a dominant strategy; fully explain your choice for both firms. Then explain what each firm will do (advertise or not); decide what the overall solution is. What it the value of profits for each firm?

Explanation / Answer

a) the pay off matrix of this game is as follows:

The above figures are in million dollars.

b) A dominant strategy is that strategy which has always greater payoff than other strategy irrespective of other player's action.

Yes both the firms have dominant stretegy. Advertise is the strategy that is dominant for both firms. Because irrespective of other firm's action advertising will always give more profit than with no advertisement.

c) The overall nash equilibrium is to Advertise, advertise. That means both firm will select their dominant stretegy and result will be advertisement by both firms. Hence outcome profit will be 20 mil dollar of firm A and 40 million dollar of firm B.

Firm B Advertise Don’t Advertise Firm A Advertise 20, 40 30, 6 Don’t Advertise 12, 24 6, 18

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---

---

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