The matrix below displays the advertising rates and profit results of the two ri

Question

The matrix below displays the advertising rates and profit results of the two rival
newspapers in a major city.

                                                   Firm B

Firm A

High AD rate

Low AD rate

High AD rate

20,20

12,26

Low AD rate

26,12

15,15

The newspapers set their advertising rates independently (i.e., no collusion).
Determine the optimal strategy for each firm. Explain briefly.

                                                   Firm B

Firm A

High AD rate

Low AD rate

High AD rate

20,20

12,26

Low AD rate

26,12

15,15

Explanation / Answer

          Firm B
Firm A     High AD        Low AD
Hgih AD      20,20         12,26
Low AD       26,12        15,15

In this problem we find the optimal strategy by comparing payoffs

                    Firm B
Firm A     High AD      Low AD
Hgih AD     20,20         12,26
Low AD      26,12        15,15

First we compared payoffs 20 and 26 for firm A and highlight 26 because payoff is higher. We do the same for 12 and 15 and highlight 15. Next we compare payoofs for Firm B by looking at the payoffs horizontally. We first compare 20 and 26 and highlight 26. Next we compare 12 and 15 and highligh 15.

Fro this we see the optimal startegy is the one with two highlights. This is Nash Equilibrium. To be clear we say (low AD, low AD) is the optimal choice.

Hope this helps

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