Suppose that Creamland and Dairy King are the only two firms that sell ice cream

Question

Suppose that Creamland and Dairy King are the only two firms that sell ice cream. The following payoff matrix 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 Creamland advertises and Dairy King doesn't advertise, Creamland will make a profit of $15 million, and Dairy King will make a profit of $2 million. Assume this is a simultaneous game and that Creamland and Dairy King are both profit-maximizing firms.

If Creamland decides to advertise, it will earn a profit ofmillion if Dairy King advertises and a profit ofmillion if Dairy King does not advertise.

If Creamland decides not to advertise, it will earn a profit ofmillion if Dairy King advertises and a profit ofmillion if Dairy King does not advertise.

If Dairy King advertises, Creamland makes a higher profit if it chooses . (advertise or not to advertise)

If Dairy King doesn't advertise, Creamland makes a higher profit if it chooses . (advertise or not to advertise)

Suppose that both firms start off not advertising. If the firms act independently, what strategies will they end up choosing?

Both firms will choose not to advertise.

Both firms will choose to advertise.

Creamland will choose not to advertise and Dairy King will choose to advertise.

Creamland will choose to advertise and Dairy King will choose not to advertise.

Again, suppose that both firms start off not advertising. If the firms decide to collude, what strategies will they end up choosing?

Creamland will choose not to advertise and Dairy King will choose to advertise.

Both firms will choose not to advertise.

Both firms will choose to advertise.

Creamland will choose to advertise and Dairy King will choose not to advertise.

Dairy King Advertise Doesn't Advertise Creamland Advertise 8, 8 15, 2 Doesn't Advertise 2, 15 9, 9

Explanation / Answer

(a) If Cream land decides to advertise, it will earn profit $8 million if Dairy King advertises and profit of $15 million if Dairy King does not advertise.

(b) If Cream land decides Not to advertise, it will earn profit $2 million if Dairy King advertises and profit of $9 million if Dairy King does not advertise.

(c) If Dairy King advertises, Cream Land makes higher profit if it Advertises ($8 Million > $2 Million)

(d) If Dairy King doesn't advertise, Cream Land makes higher profit if it Advertises ($15 Million > $9 Million)

(e) If firms act independently,

- Both firms will choose to Advertise.

(f) If firms decide to collude,

- Both firms will choose Not to Advertise.

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