Suppose that Cream land and Dairy King are the only two firms that sell ice crea

Question

Suppose that Cream land and Dairy King are the only two firms that sell ice cream. The following payoff matrix shows the profit (in motions of dollars) each company will earn depending on whether or not it advertises: For example, the upper right cell shows that if Cream land advertises and Dairy King doesn't advertise, Cream land will make a profit of $15 million. and Dairy King will make a profit of 53 million. Assume this is a simultaneous game and that Cream land and Dairy King are both profit-maximizing firms. If Cream land decides to advertise, it will earn a profit of million if Dairy King advertises and a profit of million if Dairy King does not advertise. If Cream land decides not to advertise, it will cam a profit of ¡million if Dairy King advertises and a profit of million if Dairy long does not advertise. If Dairy King advertises, Cream land makes a higher profit it chooses_If Dairy King doesn't advertise, Cream land makes a higher profit if it chooses Suppose that both firms start off not advertising. If the firms act independently, what strategies will they end up choosing? Cream land will choose not to advertise and Dairy long will choose to advertise. Cream land will choose to advertise and Dairy King 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 Cream land will choose not to advertise and Dairy King will choose to advertise. Cream land will choose to advertise and Dairy King will choose not to advertise.

Explanation / Answer

Look at the payoff matrix. First payoff in each strategy, includes the payoff for Cream Land and the second one shows the payoff for the Dairy King.

1. If Cream Land decides to advertise, it will earn a profit of 9 million if dairy king advertises and a profit of 15 million if dairy king does not advertises.

2. If creamland decides not to advertise, it will earn a profit of 3 million if dairy king advertises and a profit of 11 million if dairy kind do not advertises.

3. If Dairy king advertises, Cream Land will make higher profit by advertising.

4. If Dairy King does not advertise, Cream Land will make higher profit by Advertising.

Dairy King Advertise Do not Advertise CreamLand Adevertise 9,9 15,3 Do not Advertise 3,15 11,11

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