Suppose Verizon and AT&T Wireless spend enormous sums of money every year to pro

Question

Suppose Verizon and AT&T Wireless spend enormous sums of money every year

to promote their wireless services, hoping to steal customers from each other.

Furthermore, assume each year they have to decide whether or not they should

spend more money on advertising. If neither firm advertises, each of them will

earn $12 million. If both advertise, each will earn $7 million in profit. If one firm

advertises and the other does not, the firm with the promotions will earn a profit

of $15 million and the other firm will earn a mere $2 million. Use a payoff matrix

to present this problem.

For the problem above:

a) If the probability of a Verizon decision to advertise is 80 percent, what is the

expected payoff to AT&Ts decision to advertise?

b) If the probability of Verizon not advertising even though AT&T does not is 10

percent, what is expected payoff to AT&Ts decision to not to advertise?

c) What should AT&T do?

Explanation / Answer

a)expected payoff to AT&Ts decision to advertise =0.8*7 +0.2*15 = 8.6 million

b)expected payoff to AT&Ts decision to not to advertise = .1*12+.9*2 = 3

c) by the NASH equilibrium pay off matrix AT &T must go for advertisement if the decision of VERIZON is not known but if both company can have some agreement of not advertising then both will be better off

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