The two leading U.S. manufacturers of high performance radial tires must set the
ID: 1247093 • Letter: T
Question
The two leading U.S. manufacturers of high performance radial tires must set their advertising strategies for the coming year. Each firm has two strategies available: maintain current advertising or increase advertising by 15%. The strategies available to the two firms, G and B, are presented in the payoff matrix below.Firm B
Increase Adv. Maintain Adv.
Firm G Increase Adv. 27, 27 50, 12
Maintain Adv. 12, 50 45, 45
The entries in the individual cells are profits measured in millions of dollars. Firm G's outcome is listed before the comma, and Firm B's outcome is listed after the comma.
Which oligopoly model is best suited for analyzing this decision? Why? (Remember it is illegal to collude in the United States.)
Is there a dominant strategy for each firm? What is it?. Justify your choice
Explanation / Answer
Please rate The prisoner's dilemma model is most appropriate for analyzing this situation because each firm must set its advertising level without knowing its rival's strategy, and we observe a dominant strategy. If the two firms could sit down and write a contract, collusion would be enforceable but of course, that is illegal in the US. Thus, increasing advertising is the dominant strategy, since each firm is better off increasing advertising regardless of its rival's action. For example, if Firm B increases, Firm G earns 27 if it increases, and 12 by not increasing. G is better off to increase. If Firm B doesn't increase, Firm G earns 45 by not increasing, 50 by increasing. Again, Firm G is better off to increase. It is obvious that no matter what B does, G is better off to increase. Firm B faces the same situation.
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