The following is a payoff matrix showing profit in millions of dollars when two

Question

The following is a payoff matrix showing profit in millions of dollars when two companies simultaneously decide on various advertising budgets ($1 million, $2 million, or $3 million):

1. In the first round of strategy elimination (when all three possible budgets are under consideration), which ad budget would the companies exclude?
Select one:
a. Papa Johns would eliminate $3 mill; Pizza Hut would eliminate $1 mill.
b. Papa Johns would eliminate $3 mill; Pizza Hut would eliminate $3 mill.
c. Papa Johns would eliminate $2 mill; Pizza Hut would eliminate $3 mill.
d. Papa Johns would eliminate $1 mill; Pizza Hut would eliminate $2 mill.

2. After the first round of elimination (previous question), would either company make a second-round elimination?
Select one:
a. Papa Johns would eliminate $3 mill; Pizza Hut would eliminate $2 mill.
b. Neither company would eliminate in the second round.
c. Papa Johns would not eliminate either; Pizza Hut would eliminate $1 mill.
d. Papa Johns eliminates $2 mill; Pizza Hut eliminates $2 mill.

3. What would be the likely outcome of this simultaneous advertising decision (i.e. what ad budget would each company end up choosing)?
Select one:
a. Papa Johns would choose $3 mill; Pizza Hut would choose $1 mill.
b. Papa Johns would choose $1 mill; Pizza Hut would choose $3 mill.
c. Papa Johns would pick $1 mill; Pizza Hut would pick $2 mill.
d. Both would choose $1 mill.

Pizza Hut Advertising Budget: $1 mill Pizza Hut Advertising Budget: $2 mill Pizza Hut Advertising Budget: $3 mill Papa John's Advertising Budget: $1 mill $30/$20 $40/$25 $40/$15 Papa John's Advertising Budget: $2 mill 35/25 30/30 45/20 Papa John's Advertising Budget: $3 mill 20/40 25/35 30/25

Explanation / Answer

1. b. Papa Johns would eliminate $3 mill; Pizza Hut would eliminate $3 mill.

This is because $ 3 mill gives least payoff to Papa Johns and Pizza Hut.

2. c. Papa Johns would not eliminate either; Pizza Hut would eliminate $1 mill.

Pizza Hut would eliminate $ 1 mill because $ 1 mill gives less payoff to Pizza Hut irrespective of decision of Papa Johns while payoff of Papa Johns is dependent upon the Pizza Hut for higher payoff.

3. c. Papa Johns would pick $1 mill; Pizza Hut would pick $2 mill.

Pizza Hut will always choose $ 2 mill because it is a dominant strategy of Pizza Hut.

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