10. The table below shows the payoff matrix between Pepsi and Coca Cola in adver
ID: 1129652 • Letter: 1
Question
10. The table below shows the payoff matrix between Pepsi and Coca Cola in advertising game between the two firms. Find the solution to this game and explain whether or not the solution you have found is a Nash equilibrium. Coca Cola Leave spending on advertisements the same Rai se spending on advertisements Raise spending$5500 for Pepsi $8000 for Pepsi on advertisements $5500 for Coca Cola $20 for Coca Cola Pepsi Leave spending $2000 for Pepsi $6000 for Pepsi on advertisements $8000for Coca Cola $600 for Coca Cola the sameExplanation / Answer
If Coca Cola raise spending on advertisements then Pepsi will also raise spending on advertisements as pay-off is higher for it with this strategy relative to the other option.
If Coca Cola leave spending on advertisements the same then also Pepsi will raise spending on advertisements as pay-off is higher for it with this strategy relative to other option.
So, Pepsi will go for raise in spending on advertisements regardless of what Coca Cola does.
Thus, raise in spending on advertisements is dominant strategy for Pepsi.
If Pepsi raise spending on advertisements then Coca Cola will also raise spending on advertisements as pay-off is higher for it with this strategy relative to the other option.
If Pepsi leave spending on advertisements the same then also Coca Cola will raise spending on advertisements as pay-off is higher for it with this strategy relative to other option.
So, Coca Cola will go for raise in spending on advertisements regardless of what Pepsi does.
Thus, raise in spending on advertisements is dominant strategy for Coca Cola.
The combination of dominant strategies is the Nash equilibrium.
So, the nash equilibrium of this game is both Pepsi and Coca Cola raising spending on advertisements.
Both players are adopting strategy from which they have no incentive to deviate as these are their dominant strategies.
When the outcome of the game is consist of strategies from which the players will not deviate then the outcome is considered as nash equilibrium.
Therefore, the outcome of this game is Nash equilibrium.
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