Two retail firms (Big Giant, and Titan) must decide whether to advertise or not

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 . 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. sales but keep their same market Titan Advertise Don'tAdvertise .. - Titan gets $ 800 Big Giant gets $ 800 Titan gets $ 600 Big Giant gets $ 1500 Advertise Big Giant Titan gets S 1500 Big Giant gets $ 600 Titan gets $ 1200 Big Giant gets S 1200 Don't Advertise 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 firm would have an incentive to break the agreement. (8) The Nash equilibrium occurs at (advertise, advertise). Briefly explain (using the numbers in t payoff matrix) why both firms would have no incentive to deviate (i.e., move) from the Nash equilibrium. (8) B.

Explanation / Answer

A) if the firms choose not to advertise then such an agreement is deemed to break. Because the firms can increase their profit by cheating and instead advertising while the other firm doesn't advertise. Each firm deviating from not advertising to advertise will have a payoff of 1500 > 1200. Therefore incentive to deviate.

B) If any of the firm deviates to not advertise while the other firm choses to advertise, the firm loses profit and earns instead 600< 800. There will never be unilateral devition incentive since advertise is a dominant startegy for each firm.

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