. Two retail firms (Big Giant, and Titan) must decide whether to advertise or no

Question

. Two retail firms (Big Giant, and Titan) must decide whether to advertise or not advertise to gain a higher share of the market. If they both advertise, they will get more sales but keep their same market shares and increase their costs. If one advertises but the other doesn't, the firm that advertises will make more money and the firm that doesn't advertise will make less money as it loses part of its market share. The payoff matrix is below Titan Advertise vertise Titan gets S 600 Big Giant gets $ 600 Titan gets $ 400 Big Giant gets S 1200 Advertise Big Giant Don't Advertise Titan gets S 1200 Big Giant gets $ 400 Titan gets S 1000 Big Giant gets S 1000 The optimal choice for both firms collectively would be to both choose "don't advertise." If both firms agreed to not advertise, briefly explain (using the numbers in the payoff matrix) why both firms would have an incentive to break the a greement. (4)

Explanation / Answer

Optimal choice of both firms is to choose Don't Advertise because it will give them payoff of $ 1000 which is higher than the payoff which each get when they choose to advertise.

But when they choose not to advertise then both firms would have an incentive to break the agreement, this is because if any of them breaks it and advertise their product then profit of that firm increases to $ 1200 while other firm's payoff reduces too $ 400.

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