In: Economics

# Consider a Cournot duopoly of two identical cigarette producing firms, Warlboro and Cramel. They produce tobacco...

Consider a Cournot duopoly of two identical cigarette producing firms, Warlboro and Cramel. They produce tobacco of same quality and, ceteris paribus, each firm sells to 1 million smokers, making $100 profits per smoker. These 2 million smokers are addicts (as most smokers are). They may change which tobacco they smoke but they do not quit. On the other hand, those who are not smokers will not start even if they are encouraged (because they understand the harm). In other words, the size of the market is fixed (the demand is extremely inelastic). Any of the two firms may try to win the customers away from the rival by advertising. If Warlboro spends$20 million on the ads while Cramel spends nothing, Warlboro wins additional half a million smokers, that is, Warlboro sells to 1.5 million while Cramel sells to 0.5 million. If Cramel spends $20 million on the ads while Warlboro spends nothing, Cramel wins additional half a million smokers, that is, Cramel sells to 1.5 million while Warlboro sells to 0.5 million. If both firms spend$20 million on the ads, their efforts cancel each the other and each firm sells to 1 million smokers. In every scenario, the profits per smoker remains $100 (not accounting for the ad spending). Think about this game and explain, in your own words, why the tobacco producers may lobby the government to ban (make it illegal) advertising tobacco products. ( Please provide answers with easy words. up to 200 words ) ## Solutions ##### Expert Solution ANSWER: The table above is the pay-off matrix for the Cournot game described in the question. From the pay-off matrix we can deduce that both the players i.e. Warlboro and Caramel have Advertise as a dominant strategy. Thus there payoffs or profit are$80 million each. These payoffs are less than the payoff they could have earned had they chosen No Advertise. So if one chooses not to advertise the other player may advertise and earn larger market share. So they will lobby the government to ban advertising so as to earn higher profits.

 Warlboro Advertise No Advertise Caramel Advertise 80, 80 130, 50 No Advertise 50, 130 100, 100

the tobacco lobby engaged in a comprehensive and aggressive political effort in state legislatures to sell tobacco with the least hindrance using lobbying, the media, public relations, front groups, industry allies, and contributions to legislators. These efforts included campaigns to neutralise clean indoor air legislation, minimise tax increases, and preserve the industry's freedom to advertise and sell tobacco. The tobacco lobby succeeded in increasing the number of states that enacted state pre-emption of stricter local tobacco control laws and prevented the passage of many state tobacco control policies. Public health advocates were able to prevent pre-emption and other pro-tobacco policies from being enacted in several states.

The tobacco lobby is a powerful presence in state legislatures. Because of the poor public image of the tobacco lobby, it seeks to wield this power quietly and behind the scenes. State and local health advocates, who often have high public credibility, can use this fact against the tobacco lobby by focusing public attention on the tobacco lobby's political influence and policy goals and expose links between the tobacco lobby and its legislative supporters.

The industry's public policy objective has been to preserve and expand its customer base, sales, and profits through sophisticated lobbying and political efforts in state legislatures. Linked to this primary policy goal have been the ongoing identification and advancement of specific profit and sales enhancing goals such as the defeat of clean indoor air legislation, cigarette excise tax increases, and restrictions on marketing and promotion as well as enactment of tort and product liability reform legislation designed to reduce legal risks and litigation costs. The industry achieves this objective through a bundle of comprehensive insider lobbying approaches coordinated with registered contract tobacco lobbyists in each state through a collaborative and hierarchal relationship with company top management and Tobacco Institute lobbying officials.

The tobacco lobbyists' comprehensive approach to influencing state policy making has included direct campaign contributions, gifts, honoraria, and charitable contributions to legislators' pet programmes, indirect (or soft money) contributions to legislators' political caucuses and parties for non-campaign political education and technical assistance purposes, and providing group entertainment such as hunting trips or sporting events to “bond” with state legislators in order to build mutual political trust and support It has also included building political support with and through allied and front groups such as smokers' rights groups, restaurant, bar, hotel, and motel associations, and funding “special projects” designed to secretly undermine state tobacco control policy, such as legislatively opposing educational anti-tobacco ASSIST (American stop smoking intervention study) programme efforts in Washington.

These policy objectives and approaches have led to and are also connected to collective state legislative outputs or governmental actions relating to tobacco control legislation and programmes, including enactment of state laws preempting local clean indoor air and other tobacco control ordinances and keeping state tobacco excise taxes low.

## Related Solutions

##### Consider a Cournot duopoly where P = 400 - 4Q1 - 4Q2. The two firms are...
Consider a Cournot duopoly where P = 400 - 4Q1 - 4Q2. The two firms are identical. Each firm treats the other firm’s production quantity as a constant. The marginal cost of production is 16 for every unit. What is the best production level for Firm 1?
##### a.) Two identical firms compete as a Cournot duopoly. The market demand is P=100-2Q, where Q...
a.) Two identical firms compete as a Cournot duopoly. The market demand is P=100-2Q, where Q stands for the combined output of the two firms, Q=q1 +q2. The marginal cost for each firm is 4. Derive the best-response functions for these firms expressing what q1 and q2 should be. b.) Continuing from the previous question, identify the price and quantity that will prevail in the Cournot duopoly market c.) Now suppose two identical firms compete as a Bertrand duopoly. The...
##### Consider two identical firms in a Cournot competition. The market demand is P = a –...
Consider two identical firms in a Cournot competition. The market demand is P = a – bQ. TC1 = cq1 = TC2 = cq2 . Find the profit function of firm 1. Maximize the profit function to find the reaction function of firm 1. Solve for the Cournot-Nash Equilibrium. Carefully discuss how the slope of the demand curve affects outputs and price.
##### Cournot: Consider a Cournot duopoly in which firms A and B simulta- neously choose quantity. Both...
Cournot: Consider a Cournot duopoly in which firms A and B simulta- neously choose quantity. Both firms have zero costs. Market demand is given by: P =360−3Q, where Q = qA + qB . (a) Derive each firm’s best-response function and plot them on the same graph. (b) Find the unique Nash Equilibrium. Label the Nash equilibrium in your graph from part (a). (c) Calculate total welfare in the Nash Equilibrium. (d) Calculate deadweight loss (if any) in the Nash...
##### Consider the following variant of theBertrand Model of Duopoly. Suppose there are two firms producing the...
Consider the following variant of theBertrand Model of Duopoly. Suppose there are two firms producing the same good and they simultaneously set prices for their product. If firm i sets a price piand firm j sets a price pj, the total quantity demanded for firm i’s product is given by:qi= 10 –pi+ ½ pjEach firm produces exactly the qidemanded by the market. Bothfirms have the same marginal cost of production: c=4. For example, if a firm produces 5 units it...
##### 13-) In a Cournot duopoly, firms 1 and 2, produce Y1 and Y2, respectively. They have...
13-) In a Cournot duopoly, firms 1 and 2, produce Y1 and Y2, respectively. They have identical total cost function C(Yi) = 2 Yi, i = 1, 2. The market demand function is Y = 20 - p, where Y = Y1 + Y2. The market price p in a Cournot equilibrium is: Select one: a. 8 b. 20 c. 12 d. 4 14-) Which of the following is not a decision faced by a firm in a perfectly competitive...
##### Two firms are participating in a Cournot duopoly. The demand function in the market is given...
Two firms are participating in a Cournot duopoly. The demand function in the market is given by Q=430−2P. Each firm’s total cost is given by C(q)=5q+q2. (1) Write down the inverse demand function and the maximization problem for Firm 1 given that Firm 2 is expected to produce q2^e. (2) Write down the reaction function q1(q2^e) for Firm 1. (3) Find the market price, quantities supplied, and firms’ profits in the Cournot equilibrium of this game.
##### Consider the equilibrium of the Cournot model of duopoly. a. Can the firms benefit from collusion...
Consider the equilibrium of the Cournot model of duopoly. a. Can the firms benefit from collusion in this instance if they happen to initially be at the intersection of the two reaction curves and the collusion is enforced? Explain your answer. b. Show that each firm has an incentive to break any collusive agreement. c. Has the experience of the international oil cartel, OPEC, supported your answers?