The following is a payoff matrix showing profit in millions of dollars when two

Question

The following is a payoff matrix showing profit in millions of dollars when two companies simultaneously decide on various advertising budgets ($1 million, $2 million, or $3 million).

                                                                                                     Pizza Hut

                                                                        $1 mill                 $2 mill                 $3 mill

                                           $1 mill                 $60/$55              $70/$60              $20/$65

Papa John’s                      $2 mill                 $80/$40              $40/$55              $60/$50

                                           $3 mill                 $85/$35              $67/$45              $65/$55

In the first round of strategy elimination (when all three possible budgets are under consideration), which ad budget would the companies exclude?

Papa Johns would eliminate $2 mill; Pizza Hut would eliminate $1 mill.

Papa Johns would eliminate $1 mill; Pizza Hut would eliminate $2 mill.

Papa Johns would eliminate $3 mill; Pizza Hut would eliminate $1 mill.

Papa Johns would eliminate $2 mill; pizza Hut would eliminate $2 mill.

After the first round of elimination (previous questions), would either company make a second-round elimination?

Papa Johns wouldn’t eliminate either; Pizza Hut would eliminate $2 mill.

Neither company would eliminate in the second round.

Papa Johns would eliminate $1 mill; Pizza Hut wouldn’t eliminate either

Both companies eliminate $2 mill in the second round.

What would be the likely outcome of this simultaneous advertising decision (i.e. what ad budget would each company end up choosing?)

Both would choose $2 mill.

Both would choose $3 mill.

Papa Johns would choose $1 mill; Pizza Hut would choose $2 mill.

Explanation / Answer

When PJ choses $1 million, PH will chose $3M>$$2M>$1M

When PJ choses $2 million, PH choses $2M>$3M>$1M

When PJ choses $3 million, PH choses $3M>$2M>$1M

When PH choses $1 million, PJ will chose $3M>$$2M>$1M

When PH choses $2 million, PJ choses $1M>$3M>$2M

When PH choses $3 million, PJ choses $3M>$2M>$1M

1.

As it can be seen from the above payoffs,

Papa Jones will eliminate $2 million, Pizza hut will eliminate $1 million

2.

When PJ choses $1 million, PH choses 3M>$2M

When PJ choses $3 million, PH choses $3M>$2M

When PH choses $2 million, PJ will chose $1M>3M

When PH choses $3 million, PJ choses $3M>$1M

Thus,

Papa Jones will eliminate neither, Pizza hut will eliminate $2 million

3.

Nash equilibrium: $3M, $3M

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.