Question

Suppose two beer producers, POTUSS Pilsner and Supreme Court Stout. If they advertise, they can both sell more beer and increase their revenue. But, the cost of advertising more than offsets the increased revenue so that each producer ends up with a lower profit than if they do not advertise. On the other hand, if only one advertises, that producer increases its market share and also its profit.

1. Create a payoff matrix using the following hypothetical information: If neither producer advertises, each earns a profit of $35 million per year. If both advertise, each earns a profit of $20 million per year. If one advertises and the other does not, the producer who advertises earns a profit of $50 million and the producer who does not advertise earns a profit of $9 million.
2. If POTUS Pilsner wants to maximize profit, will it advertise? Briefly explain.
3. If the Supreme Court Stout wants to maximize profit, will it advertise? Briefly explain.
4. Is there a dominant strategy for each producer? Briefly explain.

Answer 1

(1) Payoff matrix as follows (Values in $ Million).

(2) If POTUS wants to maximize profit, it will decide to Advertise, since payoff will be higher (20 > 9 and 50 > 35).

(3) If SUPREME wants to maximize profit, it will decide to Advertise, since payoff will be higher (20 > 9 and 50 > 35).

(4) A dominant strategy is the strategy chosen by one player irrespective of strategy chosen by the other placer.

When POTUS decides to Advertise, SUPREME's best strategy is to Advertise since payoff is higher (20 > 9).

When POTUS decides Not to Advertise, SUPREME's best strategy is to Advertise since payoff is higher (50 > 35).

So SUPREME has a dominant strategy to Advertise.

When SUPREME decides to Advertise, POTUS's best strategy is to Advertise since payoff is higher (20 > 9).

When SUPREME decides Not to Advertise, POTUS's best strategy is to Advertise since payoff is higher (50 > 35).

So POTUS has a dominant strategy to Advertise.