Question

Consider two cigarette manufactures considering whether to advertise. Where is the Nash equilibrium of this game?...

Consider two cigarette manufactures considering whether to advertise. Where is the Nash equilibrium of this game?

Company B (payouts on right)
Do Not Advertise Advertise
Company A (payouts on left) Do Not Advertise (50, 50) (20, 60)
Advertise (60, 20) (27, 27)

Select one:

a. Neither company advertises

b. Both companies advertise

c. Company B doesn’t advertise, Company A advertises

d. Company A advertises, Company B doesn’t advertise

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Answer #1

b. Both companies advertise

(Given that Company A do not advertise, Company B's best response is to advertise (60)
Given that Company A advertise, Company B's best response is to advertise (27)
Given that Company B do not advertise, Company A's best response is to advertise (60)
Given that Company B advertise, Company A's best response is to advertise (27)
So, best response of both companies occur simultaneously when they choose to advertise. Thus, Nash equilibrium of the game is both companies advertise or (27, 27)

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