4) Suppose there are two beer producers, ImBev and SAB Miller. If they advertise

Question

4)         Suppose there are two beer producers, ImBev and SAB Miller. If they advertise, they can both sell more beer and increase their revenue. The problem is that the cost of advertising more than offsets the increased revenue and each brewer ends up with a lower profit than if they don’t advertise. But, if only one brewer advertises, that brewer will increase its market share and profit.

a.         Draw a payoff matrix using the following data: If neither brewer advertises, each earns a profit of $70 million per year. If both advertise, each earns a profit of $40 million per year. If one advertises and the other does not, the brewer who advertises earns a profit of $100 million and the brewer that does not advertise earns a profit of $18 million.

b.         If ImBev tries to maximize profit, should it advertise? Explain.

c.         If SAB Miller tries to maximize profit, should it advertise? Explain.

d.         Does each brewer have a dominant strategy? Explain.

Explanation / Answer

Answer:

Advertise

Not advertise

Advertise

40,40

100,18

Not advertise

18,100

70,70

This is the pay off matrix for these producers. Now if one knows the other strategy that means if they for a cartle the will end up by not advertisinig because on that case both will get $70 million profit. But since here they dont have any idea about other strategy they will not take risk. That means if one choose not to advertise then there is a chance that he will get $18 million profit which is much lower than any outcome of advertising. So no one will choose not to advertise and end up with advertising and getting $40 million profit.

Dominant strategy means a strategy by which one player can earn larger profit irrespective of other strategy. So in this case no one has domonant strategy since here one's profit may become equal or much lower depending on other strategy.

Advertise

Not advertise

Advertise

40,40

100,18

Not advertise

18,100

70,70

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