need solution 5. Nash Equilibrium. The breakfast cereal industry is heavily conc

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5. Nash Equilibrium. The breakfast cereal industry is heavily concentrated. Kellogg General Mills, General Foods (Post) and Ralcorp account for over 83 per cent of industry sales. Advertising by individual firms does not convince more people to eat breakfast. Effective advertising simply steals sales from rivals. Big profit gains could be had if these rivals could simply agree to stop advertising. Assume Kellogg and General Mili s are trying to set optimal advertising strategies. Kellogg ca choose either row in the payoff matrix defined below, whereas Geeral Mills can choose either column. The first number in each cell is Kellogg's payoff; the second number is the payoff to General Mills. This is a one-shot, simultaneous-move game the profit payoff to Kellogg. The second number is the profit payoff to General Mills and the first number in each cell is Geeral Mills Competitive Strategy Advertise Don 't Advertise ("Lefi Right" Kellogg Advertise $800 million, $800 millio $1.5 billion. S600 million "Up") Don't Advertise $600 million, S1.5 billion SI billion, SI billion "Down") A. Briefly describe the Nash equilibrium concept. B. Is there a Nash equilibrium strategy for each firm? If so, what is it?

Explanation / Answer

A. Nash Equilibrium is a strategy used in game theory, In Nash Equilibrium, the optimal outcome is chosen where no player has an incentive to move to another strategy. There are 2 or more players, each player has 2 or more strategies. Each player has to decide the best move given other person's move. A game may have multiple Nash Equilibria or none at all.

B. Yes, there is a Nash Equilibrium strategy for each firm. It is for both of them to Advertise.

So, the Nash equilibrium (Best payoff combination for both players) is

(Advertise, Advertise) = Where both Kellogg and General Mill Advertises.

NOTE= In the Nash Equilibrium the profit matrix is $800 million, $800 million.

It is less than the profit payoff matrix of $1 Billion, $1 Billion. This would benefit both the companies but it is possible only when both companies join hands and mutually agree to it.

Since that is not possible and both companies can only guess the strategy for other company and form their decisions. It's best for them to Advertise since they do not know what the other company will do.

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