Question

Coors and Anheuser-Busch (Budweiser) are competing against each other to try to capture a larger share of the US beer market by conducting national advertising campaigns. The NFL offers the best target market audience (males, aged 18-34) because young men are the largest customer group for these companies beer products.

Each company had two advertising choices:

1. Advertise $100M annually for each company with the NFL. This would lead to profits for each company of $2B annually; or

2. Advertise $200M annually for each company with the NFL. This would lead to profits for each company of $1B annually.

However, if one company advertised $200M, while the other remained at $100M, the beer company that increased its advertising would have profits of $2.5B while the other company would have profits of $500M.

What profit outcomes will occur for Coors and Anheuser-Busch given the above framework? What is the impact on the NFL? Assume the management teams of Coors and Anheuser-Busch Make have complete knowledge (i.e. perfect information) on all of the possible outcomes, not only for their own company, but for their competitor. Make sure to draw a payoff matrix to support your answer.

Answer 1

Case 1)Let us assume that both players (Coors,C and Anhueser-Busch, AB) play $100M

In this case, Profit for C = Profit for AB = $2B - $100M (spent for advertising) = $1900M per year

In this case, revenue for NFL= $100M + $100M = $200M

Case 2) Let us assume that both players play $200M

In this case, Profit for C = Profit for AB = $1B - $200M = $800M per year

In this case, revenue for NFL = $200M + $200M = $400M

Case 3) Let us assume that C plays $200M and AB plays $100M

In this case, Profit for C = $2.5B - $200M = $2300M per year

Profit for AB = $500M - $100M = $400M per year

In this case, revenue for NFL = $200M + $100M = $300M

Case 4) Let us assume that C plays $100M and AB plays $200M

In this case, Profit for C = $500M - $100M = $400M per year

Profit for AB = $2.5B - $200M = $2300M per year

In this case, revenue for NFL = $100M + $200M = $300M

Now the payoff matrix in this case is :

Player C

Play $ 100M Play $200M

  Play $100M $1900M ($1900M) $2300M ($400M)

Player AB Play $200M $2300M ($400M) $800M ($800M)

Note that the payoffs for player AB are shown bold

Note that these payoffs are very similar to the ones in the famous prisoner's dilemma game. The payoff for both the players is maximized if both play $100M but if one player plays $200, the payoff for player playing $100M is greatly reduced. Therefore, there exists a Nash equilibrium in this game, where both players play $200M and get a payoff of $800M each.

In this case, Revenue of NFL is 400M.