Suppose that Fizzo and Pop Hop are the only two firms that sell orange soda. The

ID: 1115156 • Letter: S

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Suppose that Fizzo and Pop Hop are the only two firms that sell orange soda. The payoff matrix that follows shows the profit (in millions of dollars) each company will earn depending on whether or not it advertises. For example, the upper right cell shows that if Fizzo advertises and Pop Hop doesn't advertise, Fizzo will make a profit of $7 million and Pop Hop will make a profit of $1 million Both Fizzo and Pop Hop are profit-maximizing firms Pop Hop 3, 3 1, 7 Advertise Don't Advertise Advertise Fizzo Don't Advertise 5, 5 If Fizzo decides to advertise, it will earn a profit of if Pop Hop advertises and a profit of if Pop Hop does not advertise If Fizzo decides not to advertise, it will earn a profit of if Pop Hop advertises and a profit of if Pop Hop does not advertise If Pop Hop advertises, Fizzo makes a higher profit if it chooses If Pop Hop doesn't advertise, Fizzo makes a higher profit if it chooses Suppose that both firms start off not advertising. If the firms act independently, what strategies will they end up choosing? O Fizzo will choose to advertise, and Pop Hop will choose not to advertise Both firms will choose not to advertise O Fizzo will choose not to advertise, and Pop Hop will choose to advertise Both firms will choose to advertise Again, suppose that both firms start off not advertising. If the firms decide to collude, what strategies will they end up choosing? Both firms will choose to advertise O Fizzo will choose not to advertise, and Pop Hop will choose to advertise O Fizzo will choose to advertise, and Pop Hop will choose not to advertise Both firms will choose not to advertise Ses

Explanation / Answer

(1)

If Fizzo advertises, it will earn profit of $3 million if Pop Hop advertises, and profit of $7 million if Pop Hop does not advertise.

If Fizzo decides not to advertise, it will earn profit of $1 million if Pop Hop advertises, and profit of $5 million if Pop Hop does not advertise.

(2)

If Pop Hop advertises, Fizzo makes higher profit if it Advertises.

If Pop Hop does not advertise, Fizzo makes higher profit if it Advertises.

(3) If both act independently,

- Both firms will choose to Advertise

(4) If firms decide to collude,

- Both firms will choose not to advertise (Since joint profit will be maximized).

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Suppose that Fizzo and Pop Hop are the only two firms that sell orange pop. The

Suppose that Fizzo and Pop Hop are the only two firms that sell orange soda. The

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Suppose that Fizzo and Pop Hop are the only two firms that sell orange soda. The

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