Question 5. (14 points) Two firms at the St. Louis airport have franchises to ca

Question

Question 5. (14 points) Two firms at the St. Louis airport have franchises to carry passengers to and from hotels in downtown St. Louis. These two firms, Metro Limo and Urban Limo, operate nine passenger vans. These duopolists cannot compete with price, but they can compete through advertising. Their payoff matrix is below: United Limo Incrcase Don't Increase Advertising 25. 15 15. 20 Advertisin 30. 0 40, 5 Metro Limo Increase Advertising Don't Increase Advertising (7 points) Does each firm have a dominant strategy? If so, explain and what that strategy is. b. 7 points) What is the Nash equilibrium? Explain where the Nash equilibrium occurs in the payoff matrix

Explanation / Answer

Both forms do not have a dominant strategy. Metro Limo experiences that if United Limo chooses to increase advertising it will be profiting from increasing advertising rather than not increasing because the payoff is 25 vs 15. But when United Limo decides not to increase advertising Metro Limo will also not advertise because its profits are reduced on advertising. United Limo on the other hand has dominant strategy of advertising every time because its profits or higher for whatever decision taken by metro Limo. Hence Metro Limo will follow United Limo and United Limo will always advertise which implies Metro Limo will also advertise.

The Nash equilibrium is increase advertising and increased advertising from both the firms. This will occur in the top left corner of the matrix where the outcome is 25 and 15.

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