5. To advertise or not to advertise Suppose that Fizzo and Pop Hop are the only

Question

5. To advertise or not to advertise Suppose that Fizzo and Pop Hop are the only two firms that sell orange soda. The following payoff matrix shows the profit (in millions of dollars) each company will earn depending on whether or not it advertises: Pop Hop Advertise Doesn't Advertise Advertise 9, 9 15, 3 Fizzo Doesn't Advertise 3, 15 11, 11 For example, the upper right cell shows that if Fizzo advertises and Pop Hop doesn't advertise, Fizzo will make a profit of $15 million, and Pop Hop will make a profit of $3 million. Assume this is a simultaneous game and that Fizzo and Pop Hop are both profit-maximizing firms If Fizzo decides to advertise, it will earn a profit of $ million if Pop Hop advertises and a profit of $milion if Pop Hop does not advertise If Fizzo decides not to advertise, it will earn a profit of advertise million if Pop Hop advertises and a profit of $

Explanation / Answer

From the given Matrix we find following conclusions

If both the form start off with not advertising, and the act independently they will use the dominant strategy of advertising and both will advertise.

If they decide to collude, both will choose not to advertise because their profits or higher.

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