Question

To advertise or not to advertise 

Suppose that Fizzo and Pop Hop are the only two firms that sell orange soda. The following payoff matrix shows the profit (in millions of dollars) each company will earn depending on whether or not it advertises: 

 For example, the upper right cell shows that if Fizzo advertises and Pop Hop doesn't advertise, Fizzo will make a profit of $18 million, and Pop Hop will make a profit of $2 million. Assume this is a simultaneous game and that Fizzo and Pop Hop are both profit-macimizing firms.

 If Fizzo decides to advertise, it will earn a profit of _______  million if Pop Hop advertises and a profit of _______  million if Pop Hop does not advertise.

 If Fizzo decides not to advertise, it will earn a profit of _______  million if Pop Hop advertises and a profit of _______  million if Pop Hop does not advertise.

 If Pop Hop advertises, Fizzo makes a higher profit if it chooses _______ 

 If Pop Hop doesn't advertise, Fizzo makes a higher profit if it chooses _______ 

Suppose that both firms start off not advertising. If the firms act independently, what strategies will they end up choosing? 

• Both firms will choose to advertise. 

• Fizzo will choose to advertise and Pop Hop will choose not to advertise. 

• Fizzo will choose not to advertise and Pop Hop will choose to advertise. 

• Both firms will choose not to advertise. 

Again, suppose that both firms start off not advertising. If the firms decide to collude, what strategies will they end up choosing? 

• Both firms will choose not to advertise.

•  Fizzo will choose not to advertise and Pop Hop will choose to advertise. 

• Both firms will choose to advertise. 

• Fizzo will choose to advertise and Pop Hop will choose not to advertise.

Answer 1

Blanks-

1) 10

2) 18

3) 2

4) 11

5) to advertise

6) to advertise

When both firms start off not advertising and firms act independently:-

-Both firms will choose to advertise

When both firms start off not advertising and firms decide to collude:-

-Both firms will choose not to advertise