Question

KRUD and WRNG are two soft-rock radio stations. They compete for an overlapping audience, but their styles are different, so that their products are, so to say, differentiated. Their profits from advertising are their payoffs, and the advertising revenue is proportional to the audience. Their strategies are to determine how much of their time to devote to commercials rather than music. If one of them cuts back on music to run more commercials, some of their audience will shift to the other station, and some will just turn off, and so the station's revenue can decline as a result. Taking this into account, each feels that the number of commercials per hour should be two-thirds of the other station's number per hour, plus 5. In a Nash equilibrium, what is the number of commercials per hour for each station? Explain in detail.

Answer 1

Nash equilibrium
Nash equilibrium is the one of the fundamental concepts in the game theory. It conceptualizes the behaviour and interactions between game participants to determine the best outcomes. It also allows predicting the decisions of the players if they are making decisions at the same time and the decisions of one player takes into account the decisions of the other players.