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

If the newspaper firms were to merge and both newspapers were managed as a
single business, how would this affect advertising pricing? Explain.

                                                   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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