Question

Cigarette manufacturers were among the first companies to advertise extensively on television. Older people today can still hum the heavily advertised jingle, “Winston tastes good like a cigarette should.” They can also remember beautiful women with black eyes as they testified, “Tarey-ton smokers would rather fight than switch.” John Wayne and other movie stars appeared in commercials to endorse cigarettes. Cigarette companies were the major sponsors for many popular television shows. The companies also paid to have cigarettes included in the actual programs. In 1962 the cartoon characters Fred and Wilma Flintstone were shown smoking Winston cigarettes.

The U.S. federal government banned television advertising of cigarettes starting in 1971. Interestingly, the leading cigarette manufacturing companies supported the ban, even though they had advertised heavily on television since 1940s.

a) Design a simple two-company game that illustrates why it might have been in the economic interests of the cigarette companies to support the ban. In designing the game, assume that there is no regulation and that the two firms simultaneously choose between advertising and not advertising. Display your hypothetical payoffs in strategic form (see Table 15.7, pg. 176) and highlight the Nash equilibrium.

Explain the intuition for why the firms in your example would favor regulation to ban advertising.

b) Can you conclude from your example that all firms in all industries will favor bans on television advertising?Explain.

Can you ever envision a situation where one firm might favor the ban and a competing firm might be against it? Explain your opinion.

Answer 1

1)

In the pay off matrix given above, Advertising is the dominant strategy for both the firms in the industry. Thus, (30,30) or (Advertising , Advertising) is the Nash equilibrium of the game mentioned above.

Since the dominant strategy of both the players in the game above is to advertise, they will favor regulation in advertising rather than ban advertising.

2)

No, the firms will not favor ban on advertising.

If both the firms enter into collusive agreement to ban advertising of the product, then both can earn a higher pay off compared to the 30,30 pay off they are earning now using advertisement. However, if one of the firm in order to make profits of 50 cheat and do not follow the collusive agreement then it will advertise and earn higher profits.