Question

There are two firms, Cope and Peski, in an oligopolistic industry. Each firm must decide whether or not to advertise during the Super Bowl this year.

The diagram below represents the matrix of expected profit payoffs for each firm depending on which of the four possible outcomes becomes reality. The first number in each cell represents the expected profit for Peski given the relevant combination of strategies for each firm. The second number in each cell represents the expected profit for Cope given the relevant combination of strategies for each firm.

	Peski advertises during Super Bowl	Peski does not advertise during Super Bowl
Cope advertises during Super Bowl	$190 mil.; $260 mil.	$220 mil.; $240 mil.
Cope does not advertise during Super Bowl	$200 mil.; $250 mil.	$240 mil.; $280 mil.

  
Assumptions:

Both of these firms act simultaneously and do not cooperate.

Neither Cope nor Peski knows in advance what the other will do.

Each firm has calculated their own expected profit payoffs depending on the four possible outcomes.

The goal of each firm is to maximize their own expected profits in each play of the game.

Neither firm knows or has calculated their rival's expected profit payoffs.

1) In Game Theory, a secure or safe strategy is when a firm chooses the strategy that avoids the possibility of the worst possible payoff. (Note; this is not the same as the average expected payoff, but the problem is similar to the Prisoner's Dilemma.)

Assuming both firms pursue a safe strategy, what strategy will each firm pursue and what level of profits will each firm actually earn? Make sure to reference the payoff matrix in your answer.

2) In Game Theory, a firm has a dominant strategy if the firm would always prefer that same strategy as its most profitable strategy, regardless of which strategy their rival chooses, in successive or repeated plays of the game.

Note: this is not the same as the average expected payoff.

Does Cope have a dominant strategy? Make sure to reference the payoff matrix in your answer.

Answer 1

1. In this Game Theory, There are two firms, Cope and Peski, in an oligopolistic industry. Each firm must decide whether or not to advertise during the superbowl this year.

Thus, There are two firms ( Cope, Peski) and two strategies ( Advertises, Do not Advertise). The goal of each firm is to maximise their own Expected profits in each play of the game.So, Firm's 1.(Peski) Safe Strategy is DO NOT ADVERTISE . This is because in each case Peski gets higher payoffs when he chooses strategy Do not Advertise ($ 220 as against $190 when Cope chooses strategy Advertise ) ,( $240 as against $200 when Cope chooses strategy DO NOT ADVERTISE). While Firm's 2 (COPE) Safe Strategy is ADVERTISE($260 as against $250 when Peski chooses to Advertise) and DO NOT ADVERTISE ( $280 as against $240 when Peski chooses to DO NOT ADVERTISE ).

2. COPE firm does not have a DOMINANT STRATEGY that is there is no Optimal choice of strategy. This firm chooses to ADVERTISE when Peski chooses to ADVERTISE and chooses to DO NOT ADVERTISE when peski's strategy is DO NOT ADVERTISE in order of getting higher payoffs (ADVERTISE, ADVERTISE) gives ($260 as against $250) , (DO NOT ADVERTISE, DO NOT ADVERTISE) gives ($280 as against $240). Hence, COPE firm's strategy varies with the strategy of firm PESKI . Therefore, COPE firm does not have a DOMINANT strategy.