Question

In a simultaneous move game: If you advertise and your rival advertises, you each will earn $3 million in profits. If neither of you advertise, you will each earn $7 million in profits. However, if one of you advertises and the other does not, the firm that advertises will earn $10 million and the non advertising firm will earn $1 million. If the players are in repeated interaction and do not know when the game will end, then a trigger strategy would be for your firm

To not advertise as long as the rival does not advertise

To advertise as long as the rival does not advertise

To not advertise as long as the rival advertises

To advertise for both firms

Answer 1

There is a dominant strategy for both you and your rival advertise in spite of the fact that not advertising has a greater payoff. Hence when interaction is repeated, you must observe that as long as rival is not advertising you must not advertise as this fetches you a higher payoff at 7 million. If we advertise as long as the rival does not advertise rival will soon advertise seeing the repeated strategy and this will reduce the overall payoff for infinite period.