Suppose that Creamland and Dairy King are the only two firms that sell ice cream

Question

Suppose that Creamland and Dairy King are the only two firms that sell ice cream. 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 Creamland advertises and Dairy King doesn't advertise, Creamland will make a profit of $15 million, and Dairy King will make a profit of $2 million. Assume this is a simultaneous game and that Creamland and Dairy King are both profit-maximizing firms. If Creamland 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 Creamland decides not 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 Dairy King advertises, Creamland makes a higher profit if it chooses. If Dairy King doesn't advertise, Creamland 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? Both firms will choose to advertise. Creamland will choose to advertise and Dairy King will choose not to advertise. Creamland will choose not to advertise and Dairy King will choose to advertise. firms. If Creamland 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 Creamland decides not 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 Dairy King advertises, Creamland makes a higher profit if it chooses. If Dairy King doesn't advertise, Creamland 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? Both firms will choose to advertise. Creamland will choose to advertise and Dairy King will choose not to advertise. Creamland will choose not to advertise and Dairy King will choose to advertise. Both firms 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 not to advertise. Both firms will choose to advertise. Creamland will choose not to advertise and Dairy King will choose to advertise. Creamland will choose to advertise and Dairy King will choose not to advertise.

Explanation / Answer

If creamland advertise he will earn $8 profit if dairy king advertise also and creamland will earn $15 profit if dairy king does not advertise. (For first case firms will operate at 1st row, 1st column of the matrix and for 2nd case firms will operate at 1st row 2nd column of the matrix).

If creamland decides not to advertise it will earn $2 if dairy king advertise and it will earn $11 if dairy king advertise.

If both the firms operate independently then both will advertise because always advertising will give them higher profit than not advrtising. Now there is a chance that they can make more profit by not advertising rather than advertise but since they are working indipendently they will play relatively safe game. And both will end up by advertising.

Similarly if they colude they will end up by advertising because if one advertise and other do not then the firm who has advertise will earn much higher.

If they form cartle and decide not to advertise then they may end up by not advertising and $11 profit.

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.