Question

In: Economics

Two firms compete by advertising. Given the profit matrix for this advertising game, identify each firm’s...

Two firms compete by advertising. Given the profit matrix for this advertising game, identify each firm’s best response to its rival’s possible actions. Does either firm have a dominant strategy? What is the Nash equilibrium?

                               Firm 1

       Do Not Advertise

            Advertise





                               Firm 2

                Do Not

               Advertise

                                    1



2

                                       0



0



                Advertise

                                    2



4

                                       1



3

How does your answer change if Firm 1 gets 3 instead of 1 when both firms advertise?

Solutions

Expert Solution

Given that firm 2 do not advertise, firm 1's best response is do not advertise(1).
Given that firm 2 advertise, firm 1's best response is do not advertise(2).
So, firm 1's dominant strategy is do not advertise because it is always chosen by firm 1 irrespective of firm 2's strategy.

Given that firm 1 do not advertise, firm 2's best response is advertise(4).
Given that firm 1 advertise, firm 2's best response is advertise(3).
So, firm 2's dominant strategy is to advertise because it is always chosen by firm 2 irrespective of firm 1's strategy.

The NE is their dominant strategy equilibrium where firm 1 do no advertise and firm 2 advertises.

When firm 1 gets 3 when both firms advertise,
Given that firm 2 do not advertise, firm 1's best response is do not advertise(1).
Given that firm 2 advertise, firm 1's best response is advertise(3) because 3 > 2.
So, firm 1 does not have any dominant strategy because there is no strategy which is always chosen by it irrespective of firm 2's choice.

Now, the NE is for both firms to advertise because their best response occurs simultaneously when they both advertise.

Rahul Sunny answered 2 years ago
Next > < Previous

Related Solutions

Advertising: Two firms compete in the breakfast cereal industry producing Wheat Krinkles cereal (Firm A) and...
Advertising: Two firms compete in the breakfast cereal industry producing Wheat Krinkles cereal (Firm A) and Rice Krinkles cereal (Firm B). Each manufacturer must decide whether to promote its product with a large or small advertising budget. The potential profits for these firms are as follows (in millions of dollars): Firm A's Actions Small Advertising Budget Large Advertising Budget Firm B's Actions Small Advertising Budget $50M $50M $30M $150M Large Advertising Budget $140M $20M $150M $150M (a) Do both firms...
1. Two firms compete in Cournot competition. Inverse demand in the market is given by P...
1. Two firms compete in Cournot competition. Inverse demand in the market is given by P = 1500 − 3 Q and each firm has constant marginal cost c = 420. a) Assuming there are no fixed costs, find the Cournot equilibrium market price and quantities produced by each firm. (20 points) b) Now suppose that each firm faces a non-sunk fixed cost of 20,000 if they produce at all. Would the firms still want to produce the amounts you...
The following payoff matrix represents a single-period, simultaneous move game to be played by two firms....
The following payoff matrix represents a single-period, simultaneous move game to be played by two firms. Show all the best responses for each player by placing checkmarks next to each payoff that reflects a best response choice. Does Firm A have a dominant strategy and if so, what is it? Does Firm B have a dominant strategy and if so, what is it? Does a Nash Equilibrium (or multiple NE) exist for this game and if so, what is it...
Two firms compete with quantities as in Cournot. Each firm has a marginal cost of $12....
Two firms compete with quantities as in Cournot. Each firm has a marginal cost of $12. The industry demand is P=48-2Q. How much output will each firm produce individually?
Two firms, A and B, compete as duopolists in an industry. The firms produce a homogeneous...
Two firms, A and B, compete as duopolists in an industry. The firms produce a homogeneous good. Each firm has a cost function given by: C(q) = 30q + 1.5q2 The (inverse) market demand for the product can be written as: P =300−3Q, where Q = q1 + q2, total output. (a) If each firm acts to maximize its profits, taking its rival’s output as given (i.e., the firms behave as Cournot oligopolists), what will be the equilibrium quantities selected...
Two firms, A and B, compete as duopolists in an industry. The firms produce a homogeneous...
Two firms, A and B, compete as duopolists in an industry. The firms produce a homogeneous good. Each firm has a cost function given by: C(q) = 30q + 1.5q2 The (inverse) market demand for the product can be written as: P = 300 − 3Q , where Q = q1 + q2, total output. Question: If each firm acts to maximize its profits, taking its rival’s output as given (i.e., the firms behave as Cournot oligopolists), what will be...
Two firms are in a market and are able to compete on quantity, as is typical...
Two firms are in a market and are able to compete on quantity, as is typical in a Cournot Oligopoly. The market demand curve is Q = 30 – 3P. The market marginal revenue curve is: MR= 10-(2/3)Q The two firms have different marginal costs. Firm A has a marginal cost of $6, while Firm B has a marginal cost of $9. (a) Find the demand curve that Firm A faces. (b) Assume that Firm A knows that Firm B...
Suppose firm A and firm B are the only two firms in an industry. Each firm’s...
Suppose firm A and firm B are the only two firms in an industry. Each firm’s Marginal Abatement cost functions is given by: MACa = 200-Ea MACb = 200-2Eb Also, there are four people, each with marginal damage function: MDi = 1/3Et , Where Et = Ea+Eb a) What is the uncontrolled emission levels of each firm? b) Find the aggregate MAC function c) Find the aggregate MD function d) Determine the socially optimal level of emissions ?t ∗ and...
Consider two firms, Firm A and Firm B, who compete as duopolists. Each firm produces an...
Consider two firms, Firm A and Firm B, who compete as duopolists. Each firm produces an identical product. The total inverse demand curve for the industry is P=250-QA+QB. Firm A has a total cost curve CAQA=100+QA2. Firm B has a total cost curve CBQB=100+2QB. Suppose for now, only Firm A exists (QB=0). What is the Monopoly equilibrium quantity and price? What is Firm A’s profit? Find the Nash Cournot equilibrium price and output level. What are the firms’ profits? Find...
2. Suppose an industry consists of two firms that compete in prices. Each firm produces one...
2. Suppose an industry consists of two firms that compete in prices. Each firm produces one product. The demand for each product is as follows: q1 = 25 − 5p1 + 2p2 q2 = 25 − 5p2 + 2p1 The cost functions are C(qi) = 2 + qi for i = 1, 2. The Nash equilibrium price is 3.75 (e) What is the percentage markup of price over marginal cost here (this is called the Lerner index)? Do the firms...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT