3.Two companies (Cancer Sticks and Coffin Nails) supply cigarettes to a region.

Question

3.Two companies (Cancer Sticks and Coffin Nails) supply cigarettes to a region. Each company can decide whether to advertise on television in this region. Profits will rise when the companies do not advertise, since advertising increases costs. However, if one company advertises and the other does not, the advertising company will take some of the customers away from the non-advertising company. The payoff matrix below reflects this.

What is the solution to this game? Is it Pareto-Optimal?

Assume that the government is considering a ban on television advertising of cigarettes. Should the cigarette companies support or oppose such a ban? Explain your decision.

Explanation / Answer

CN Adverties CN Not Adverties CS Adverties (70,75) (90,70) CS Not Adverties (60,90) (80,85) CN Adverties CN Not Adverties CS Adverties (CS,CN) (CS,CN) CS Not Adverties (CS,CN) (CS,CN) So if we look at the values of payoff matrix for cs CS Adverties 70 90 CS Not Adverties 60 80 So CS benefits more through advertising and so it goes for advertising on tv. So if we look at the values of payoff matrix for CN CN Adverties CN Not Adverties 75 70 90 85 So CN benefits more through advertising and so it goes for advertising on tv. So they both advertise and go for (70,75) (CS,CN) This is not a pareto optimal case because if they both don’t advertise then they can benefit more i.e. (80,85) (CS,CN) So there is a better state than the game solution of (70,75) and so not a case of pareto optimality. If the government puts a ban on the advertising of the cigarettes, then they both should support it because they both will benefit and reach a state of pareto optimality at (80,85) (CS,CN).

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