Question

1. Two men’s clothing stores that compete for most of the market in a small town in Ohio must choose their advertising levels simultaneously. The following payoff table facing the two firms, Arbuckle & Son and Mr. B’s, shows the weekly profit outcomes for the various advertising decision combinations.

		Mr. B’s advertising level
		High	Low
Arbuckle & Son advertising level	High	A $4,000, $4,000	B $3,000, $5,000
	Low	C $5,000, $3,000	D $3,500, $3,500

Do Arbuckle and Son and/or Mr. B have dominate strategies? What are the likely outcomes if the firms cannot communicate about their advertising strategies. What is the likely outcome if Arbuckle announces ahead of time that it is planning an aggressive advertising campaign?

Answer 1

Yes, the firms in the market have dominant strategy that is to have a low advertising level. Starting from the point where they are advertising high they are getting a payoff of 4000, if they advertise low they will get a pay of of 5000, so, to get a higher output they will keep the advertising low.

If the firms cannot communicate of their strategies they will keep the advertisement low and together they will getting a payoff of 3500 each.

iF they announce that the other firm in going to spend big on advertisement Mr B will keep the advertisement low and get a better payoff.