Question

Taco-bell and Rio wrap are competing in the MI market. Each firm is deciding whether to follow a high spending advertising strategy. More aggressive advertising would lead high spending on media and billboard advertising. The profits associated with each strategy are as follows:

Taco-bell	Rio-Wrap
		Aggressive	Passive
	Aggressive	100, 90	150, 50
	Passive	60, 130	120, 110

a) Does either firm have a dominant strategy? If yes, what is the dominant strategy for each firm?

b) Does either firm have a dominated strategy? If yes, state the strategy for each firm.

c) Find the equilibrium. Is this equilibrium Nash or Dominant strategy or both?

d) Is this game an example of the prisoners’ dilemma? Explain

e) If this game changes to infinitely repetead game, will a cooperation occur? What would be the cooperated strategy? What are their expected payoffs? (assume i=5%)

Answer 1

a) yes, both have dominant strategy : play aggressive A

While Passive is dominated by A

	A	P
A	(100*,90•)	(150*,50)
P	(60,130•)	(120,110)

b) as for both,

Passive gives lower payoff, as compared to A, for any action choice of other firm

So dominated strategy : Passive

C) NE : (A,A)

it is dominant strategy NE

D)yes, game is example of Prisoners dilemma

bcoz if both could Cooperate & play (P,P), both will be better off, as compared to NE

E) if game infinitely repeated,

Then