Question

Consider a Cournot duopoly of two identical cigarette producing firms, Warlboro and Cramel. They produce tobacco of same quality and, ceteris paribus, each firm sells to 1 million smokers, making $100 profits per smoker. These 2 million smokers are addicts (as most smokers are). They may change which tobacco they smoke but they do not quit. On the other hand, those who are not smokers will not start even if they are encouraged (because they understand the harm). In other words, the size of the market is fixed (the demand is extremely inelastic). Any of the two firms may try to win the customers away from the rival by advertising. If Warlboro spends $20 million on the ads while Cramel spends nothing, Warlboro wins additional half a million smokers, that is, Warlboro sells to 1.5 million while Cramel sells to 0.5 million. If Cramel spends $20 million on the ads while Warlboro spends nothing, Cramel wins additional half a million smokers, that is, Cramel sells to 1.5 million while Warlboro sells to 0.5 million. If both firms spend $20 million on the ads, their efforts cancel each the other and each firm sells to 1 million smokers. In every scenario, the profits per smoker remains $100 (not accounting for the ad spending). 2. Think about this game and explain, in your own words (50-200 words), why the tobacco producers may lobby the government to ban (make it illegal) advertising tobacco products.

( Please provide answers with as easy words and sentence as possible . limited up to 200 words )

Answer 1

		Warlboro
		Advertise	No Advertise
Caramel	Advertise	80, 80	130, 50
	No Advertise	50, 130	100, 100

The table above is the pay-off matrix for the Cournot game described in the question. From the pay-off matrix we can deduce that both the players i.e. Warlboro and Caramel have Advertise as a dominant strategy. Thus there payoffs or profit are $80 million each. These payoffs are less than the payoff they could have earned had they chosen No Advertise. So if one chooses not to advertise the other player may advertise and earn larger market share. So they will lobby the government to ban advertising so as to earn higher profits.