Suppose that Fizzo and Pop Hop are the only two firms that sell orange soda. The

Question

Suppose that Fizzo and Pop Hop are the only two firms that sell orange soda. 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 Fizzo advertises and Pop Hop doesn't advertise, Fizzo will make a profit of $15 million, and Pop Hop will make a profit of $3 million. Assume this is a simultaneous game and that Fizzo and Pop Hop are both profit-maximizing firms.

If Fizzo decides to advertise, it will earn a profit of _____ million if Pop Hop advertises and a profit of _____ million if Pop Hop does not advertise.

If Fizzo decides not to advertise, it will earn a profit of_____ million if Pop Hop advertises and a profit of _____ million if Pop Hop does not advertise.

If Pop Hop advertises, Fizzo makes a higher profit if it chooses ______ (choose one: not to advertise or to advertise)

If Pop Hop doesn't advertise, Fizzo makes a higher profit if it chooses  ______ (choose one: not to advertise or 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.

Fizzo will choose not to advertise and Pop Hop will choose to advertise.

Fizzo will choose to advertise and Pop Hop will choose not to advertise.

Both firms will choose to advertise.

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

Fizzo will choose to advertise and Pop Hop will choose not to advertise.

Both firms will choose not to advertise.

Fizzo will choose not to advertise and Pop Hop will choose to advertise.

Both firms will choose to advertise.

Explanation / Answer

(1)

If Fizzo advertises, it will earn profit of $9 million if Pop Hop advertises, and profit of $15 million if Pop Hop does not advertise.

If Fizzo decides not to advertise, it will earn profit of $3 million if Pop Hop advertises, and profit of $11 million if Pop Hop does not advertise.

(2)

If Pop Hop advertises, Fizzo makes higher profit if it chooses to Advertise.

If Pop Hop does not advertise, Fizzo makes higher profit if it chooses to Advertise.

(3) If both act independently,

- Both firms will choose to Advertise

(4) If firms decide to collude,

- Both firms will choose not to advertise (Since joint profit will be maximized when both of them choose not to advertise).

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