Question

10. Imagine a scenario in which your company has only 1 competitor. You and your competitor are both considering running TV ads to promote your own product. You estimate that you and your competitor profits will be as follows if you do or do not run the ads:

		Competitor
		Advertise	Do not advertise
Your firm	Advertise	2000, 1500	2800, 700
	Do not advertise	900, 2100	2600, 1800

What is the Nash equilibrium of this game? (3pts)
If you and your competitor could talk on the phone (imagine it was legal to do so) to coordinate whether to advertise or not, what would the outcome be? (2pts)

Answer 1

(a)

If Competitor Advertises, my firm’s best strategy is to Advertise since payoff is higher (2000 > 900).

If Competitor Doesn't Advertise, my firm's best strategy is to Advertise since payoff is higher (2800 > 2600).

If my firm Advertises, Competitor's best strategy is to Advertise since payoff is higher (1500 > 700).

If I Don't Advertise, Competitor's best strategy is to Advertise since payoff is higher (2100 > 1800).

Nash equilibrium is: (Advertise, Advertise) [see below].

(b)

If collusion was permitted, the firms will want to maximize joint profit which would mean the outcome of: (Don't Advertise, Don't Advertise) which has the highest joint profit (= 2600 + 1800).