Suppose that Expresso and Beantown are the only two firms that sell coffee. The

Question

Suppose that Expresso and Beantown are the only two firms that sell coffee. The following payoff matrix shows the profit (in millions of dollars) each company will earn depending on whether or not it advertises: For example, the upper right cell shows that if Express advertises and Beantown doesn't advertise. Expresso will make a profit of $20 million, and Beantown will make a profit of $3 million. Assume this is a simultaneous game and that Expresso and Beantown are both profit-maximizing firms. If Expresso decides to advertise, it will earn a profit of million if Beantown advertises and a profit of million if Beantown does not advertise. If Expresso decides not to advertise, it will earn a profit of million if Beantown advertises and a profit of million if Beantown does not advertise. If Beantown advertises. Expresso makes a higher profit if it chooses If Beantown doesn't advertise. Expresso makes a higher profit if it is. Suppose that both firms start off not advertising. If the firms act independency, what strategies will they end up choosing? Both firms will choose not to advertise. Both firms will choose to advertise. Expresso will Choose not to advertise and Beantown will choose to advertise. Expresso will choose to advertise and Beantown will choose not to advertise. Again, suppose that both firms start off not advertising. If the firms decide to collude, what strategies will they end up Choosing? Both firms will choose to advertise. Expresso will choose to advertise and Beantown will choose not to advertise. Expresso will choose not to advertise and Beantown will choose to advertise. Both firms will choose not to advertise.

Explanation / Answer

(a)

If Espresso advertises, its profit is $10 million if Beantown advertises, and $20 million if Beantown does not adevertise.

If Espresso doesn't advertise, its profit is $3 million if Beantown advertises, and $11 million if Beantown does not adevertise.

If Beantown advertises, Espresso makes higher profit if it Advertises.

If Beantown does not advertise, Espresso makes higher profit if it Advertises.

(b)

If they act independently, Both firms will choose to Advertise.

(c)

If they collude, Both firms will choose Not to advertise.

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