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

Low AD

High AD

20,20

12,26

Low AD

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

Low AD

High AD

20,20

12,26

Low AD

26,12

15,15

Explanation / Answer

But if one player adopts higher advertisement and another player adopts low advertisement than the player with low advertisement will receive a higher payoff. And if they form a cartel or an informal agreement both opt for a higher advertisement and can receive a higher payoff of 20 and 20 each.

But at this stage both has an option to cheat others by decreasing to a lower Ad budget for a higher payoff of 26. Thus ultimately both of them fearing cheating from each other will settle at low advertising budget with a payoff of 15 and 15. This is the Nash equilibrium as they don’t have any incentive to deviate from this state.

(Dominant strategy: The best strategy a player can adopt no matter what other player chooses.

Nash equilibrium: A best strategy that a player can adopt considering the other player strategy. There will be no incentive to deviate from this strategy.)

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