Mars and Hershey\'s dominate the domestic chocolate candy bar business. In this
ID: 1169357 • Letter: M
Question
Mars and Hershey's dominate the domestic chocolate candy bar business. In this mature market, advertising by individual firms does little to convince more people to eat candy. Effective advertising simply steals sales from rivals. Big profit gains could be had if these rivals could simply agree to stop advertising. Assume Mars and Hershey's are trying to set optimal advertising strategies. Mars can choose either row in the payoff matrix defined below, whereas Hershey's can choose either column. The first number in each cell is Mars payoff; the second number is the payoff to Hershey's. This is a one-shot, simultaneous-move game and the first number in each cell is the profit payoff to Mars. The second number is the profit payoff to Hershey's.
A. Briefly describe the Nash equilibrium concept.
B. Is there a Nash equilibrium strategy for each firm? If so, what is it?
Explanation / Answer
Answer (a):
It is problem on game yheory. In this theory two opposite parties are there. They have two strategies to play. There objective is to get best out of them. In order to select there strategies they will take into consideration the action of his rival. After considering possible actions of rival, each player will select his strategy. In this process if both of them arrive at an optimum strategy then they will be in equilibtrium. In Nash equilibrium no player has incentive to deviate from this equilibrium as they will not make any extra gain if other remains firm in his selected strategy.
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Answer (b):
In this problem, M and H are two players in a domestic candy bar chocolate business. Each of them has two strategies. They can either go for advertising or may not go for it. Advertisement will steal sales from other but not profit. Profit is increased if rival stops advertising. Thus two strategies are profit increase and sales stealing .
It is not clear from the given problem which one is the payoff data. It appears that it has eight figures. They are,
-6,2, 1, 4, 7,4,0, -1. First one is profit payoff of M. Thus M has profit pay off -6. Next one is profit pay off of H. These two figures will fill up cell (1,1). In this manner payoff of cell (1,2) is 1,4. For cell (2,1) it is 7,4 and for cell (2,2) it is 0,-1. On this assumption pay off matrix is formed below:
Consider above pay off table. Analyse it in the following manner to see the existence Nash equilibrium.
1. First analyse it from M's point of view. If rival of M take profit strategy then M has a pay off -6 if it also goes for profit strategy. Otherwise it will get pay off of 7. as 7 is the higher one, M will go for sale strategy if his rival H has decided to go for profit strategy.
2. Now suppose H has decided to go for sale strategy. Then M will have +1 pay off if it select profit strategy. In sale strategy its payoff is 0. As is better for M, it will go for profit strategy .
3.Now analyse it from H's point of view. Suppose its rival M has decided to go for profit. Then H has pay off 2 if it selects profit strategy. Otherwise it will go for sale to have 4 pay off. Note that pay off 4 is maximum. So H will adopt sale strategy if M has decided profit strategy.
4. Finally consider the situation when M has decided to go for sale.Then H has 4 pay off at profit strategy and -1 pay off at sale strategy. Obviously H will take profit strategy.
Above analysis shows that combination selected can be either cell (2,1) or cell (1,2). If you compare the two, cell (2,1) is best for M. H is indifferent among these two cells as in both case it is getting same payoff of 4. Thus finally they will settle at cell (2,1). M will go for stealing sale through advertisment while H will go for profit. It is a Nash equilibriumas neither of them wil be benefitted by moving from this cell. In other words they do not have any incentive to move from it.
H Profit Sale Profit -6,2 1,4 M Sale 7,4 0,-1Related Questions
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