Question

Consider the following information for a simultaneous move game: If you advertise and your rival advertises, you each will earn $5 million in profits. If neither of you advertises, you will each earn $10 million in profits. However, if one of you advertises and the other does not, the firm that advertises will earn $15 million and the non-advertising firm will earn $1 million. If you and your rival plan to be in business for 10 (ten) years, then the Nash equilibrium is:

A) For each firm to advertise in early years, but not advertise in later years.

B) For each firm to not advertise in any year.

C) For neither firm to advertise in early years, but to advertise in later years.

D) For each firm to advertise every year.

.... PLEASE EXPLAIN THE REASON. DONT GIVE ME JUST THE ANSWER

Answer 1

PAYOFF MATRIX

YOUR RIVAL
YOU		Advertise	Advertise not
Advertise	5,5	1,15
Advertise not	1,15	10,10

Your dominant Strategy is Advertise because whatever is the strategy of your rival, you do better when you advertise.Same case with your river that whatever you do, your rival does better when they advertises.If you and your rival decide or plan to be in business for 10 year i.e finite period of time , they will mutually decide to for each firm to advertise in early years, but not advertise in later years. so, it will give them highest mutual profits for business.Hence (a) is correct option.

So, The Nash equilibrium for early days (Advertise,Advertise)