Question

MTN and Airtel are two telecommunication giants engaged in a battle to win customers from a saturated market of mobile users. Historically, they both know that intensive advertising can help them win customers from other operators even though advertising is expensive. So each firm has to decide whether to choose a high level of advertising (H) or a low level of advertising (L). If both firms choose high level of advertising, the advertisement campaigns will simply offset each other and each firm earns a profit of USD 5 million. If both firms choose low level of advertising each earns a profit of USD 12 million. If one firm chooses high advertising and the other firm chooses low level of advertising, the firm that chooses high advertising gets a profit of USD18 and the firm with low advertising gets at profit of USD 2 million.

(a). In which type of market are the firms operating? Expalin your answer

(b). Identify the elements of the game

(c). Represent the game in the normal/matrix form

(d). Do the players have a dominant strategy? Explain

(e). What is the Nash equilibrium of the game and why?

(f). What is the Pareto preferred outcome and why?

(g). What type of game is MTN and Airtel engaged in? Explain your answer

(h). Identify any type of game which has multiple equilibria unlike the above game and show how that game can be solved?

Answer 1

		Airtel
		H	L
MTN	H	5, 5	18, 2
L	2, 18	12, 12

a) Oligopoly

d) Dominant strategy is H. H is dominant over L. Looking at the payoffs above, L strategy is strictly dominated by H.

e) Nash equillibrium is (H,H) Payoffs is (5,5). This is because the fear of MTN and Airtel is that the other could choose H, if they choose L.

f) Pareto preffered is (L,L) Payoffs is (12,12)

g) MTN and Airtel are engaged in 2 player game similar to prissioners dillema.