In: Economics
The following is a payoff matrix showing profit in millions of dollars when two companies simultaneously decide on various advertising budgets ($1 million, $2 million, or $3 million):
Blank for Formatting | Pizza Hut Advertising Budget: $1 mill | Pizza Hut Advertising Budget: $2 mill | Pizza Hut Advertising Budget: $3 mill |
Papa John's Advertising Budget: $1 mill | $225/$175 | $215/$185 | $210/$180 |
Papa John's Advertising Budget: $2 mill | 235/165 | 210/170 | 205/175 |
Papa John's Advertising Budget: $3 mill | 215/155 | 205/160 | 200/165 |
QUESTION:
What would be the likely outcome of this simultaneous advertising decision (i.e. what ad budget would each company end up choosing)?
Select one:
a. Both would choose $3 mill.
b. Papa Johns would choose $2 mill; Pizza Hut would choose $1 mill.
c. Papa Johns would choose $3 mill; Pizza Hut would choose $2 mill.
d. Papa Johns would pick $1 mill; Pizza Hut would pick $2 mill.
Option (d).
When Pizza Hut chooses $1 million, Papa John's best strategy is to choose $2 million since payoff is highest (235 > 225 > 215).
When Pizza Hut chooses $2 million, Papa John's best strategy is to choose $1 million since payoff is highest (215 > 210 > 205).
When Pizza Hut chooses $3 million, Papa John's best strategy is to choose $1 million since payoff is highest (210 > 205 > 200).
When Papa John chooses $1 million, Pizza Hut's best strategy is to choose $2 million since payoff is highest (185 > 180 > 175).
When Papa John chooses $2 million, Pizza Hut's best strategy is to choose $3 million since payoff is highest (175 > 170 > 165).
When Papa John chooses $3 million, Pizza Hut's best strategy is to choose $3 million since payoff is highest (165 > 160 > 155).
Therefore, Nash equilibrium (best outcome) is: Papa John chooses $1 million, Pizza Hut chooses $2 million [See below].