Question

Cadbury and Nestle both have a choice of keeping their advertising spends constant and earning a profit of INR 50 million each. If they both advertise, their profits drop to INR 20 million each. However if Cadbury hikes its advertising expense and Nestle doesn't, Cadbury makes a profit of INR 60 million but Nestle makes only 10 million. Conversely if Nestle hikes its advertising expense and Cadbury doesn't, Nestle makes a profit of INR 60 million and Cadbury makes only 10 million.

a. Create the payoff matrix and attach an image of the same

b. Is there a dominant strategy for Cadbury and Nestle?

c. What would be the Nash equilibrium?

Answer 1

a)

		Nestle
		Advertise	Don't Advertise
Cadbury	Advertise	(20, 20)	(60, 10)
Don't Advertise	(10, 60)	(50, 50)

b) If Cadbury advertise, Nestle choose to advertise because it give them profit of 20 among 20 and 10.

If Cadbury not advertise, Nestle choose to advertise because it give them profit of 60 among 60 and 50.

Thus, Nestle have a dominant strategy of advertising no matter what Cadbury do.

If Nestle advertise, Cadbury choose to advertise because it give them profit of 20 among 20 and 10.

If Nestle not advertise, Cadbury choose to advertise because it give them profit of 60 among 60 and 50.

Thus, Cadbury have a dominant strategy of advertising no matter what Nestle do.

c) As both of them have a dominant strategy by advertising, there occurs a Nash equilibrium when both of them advertise.