Scenario 17-4. Consider two cigarette companies, PM Inc. and Brown Inc. If neith

Question

Scenario 17-4. Consider two cigarette companies, PM Inc. and Brown Inc. If neither company advertises, the two companies split the market and earn S50 million each. If they both advertise, they again split the market, but profits are lower by S10 million since each company must bear the cost of advertising. Yet if one company advertises while the other does not, the one that advertises attracts customers from the other. In this case, the company that advertises earns S60 million while the company that does not advertise earns only $30 millicm Refer to Scenario 17-4. If these two companies collude and agree upon the best joint strategy, Oa. neither company will advertise. Ob. both companies wil advertise. c. PM Inc. will advertise but Brown Inc. will not. Brown Inc. will advertise but PM Inc. will not.

Explanation / Answer

Answer.) A.) Neither company will advertise.

Note that if they are not cooperating then each would be following its dominant strategy to advertise and earning yield (40,40). But since both are cooperating therefore they would try to avoid the expenditure on advertising and would end up earning higher yield for each firm (50,50) by deciding not to advertise by both the firms.

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