Question

Suppose you manage a large company’s marketing department and are responsible for deciding whether or not to advertise in the Super Bowl. Your team of analysts estimate that for each advertisement, your firm would generate $4 million in additional revenue for the company. It costs $5 million to run a 30-second advertisement. Therefore, for each advertisement, your company would lose $1 million in profit.

a) Explain why it could still be a good business decision to purchase an advertisement, even though you know in advance that your company would lose $1 million in profit?

b) Depict this situation with a game theory payoff matrix. Your company (A) and a major competitor (B) have two potential strategies: to advertise or to not advertise during the super bowl. The payoffs in each cell represent what happens to your profit. If you both advertise your payoffs are negative $1 million each. Create payoffs in the other cells such that the Nash equilibrium is that both firms advertise and lose $1 million each

Answer 1

A) Answer

Marketing department shoulder's the big responsibility of advetising the company's products to a large number of people. Further, marketing expenses of a company are never seen as an expense rather it is visualized as a revenue generating department. In the given scenario, though the company' loses 1 million in profit there is still 3.5 million revenue generated for the company.

Business is all about investing what we have earned from the business. Similarly for this company it has decided to invest the profit earned from by marketing. Hence it is definitely a wise decision yo advertise in super bowl. Further the company should hesitate only when it spends its working capital for marketing which will directly affect managing of operational expense.

Hence it us definitely a wise decision for the company to advertise in super bowl.

B)Answer

Suppose you run a large company’s marketing department and are responsible for deciding whether or not to advertise in the Super Bowl. Your team of analysts estimate that for each advertisement, your firm would generate $3.5 million in additional revenue for the company. It costs $4.5 million to run a 30-second advertisement. Therefore, for each 30- second advertisement, your company would lose $1 million in profit.

Therefore the opportunity cost for advertisement is $1 million (negative).

Now the payoff matrix is describe as follows: Your company (A) and a major competitor (B) have two potential strategies: to advertise or to not advertise during the super bowl. The payoffs in each cell represent what happens to company A profit. Therefore this is two person zero sum game and the strategies are shown the company A strategies. If both advertisecompany A payoffs are negative $1 million each. If neither company advertises, the payoffs are $0 each. Now when the company not to advertise then the opportunity cost which is saved by the company A is $1 million, which is the pay off of the company A.

	Company A
Company B		To advertise	Not to advertise	Minimum of each row
To advertise	-1	1	-1
Not to advertise	-1	0	-1
Maximum of each column	-1	1	-1/-1

As per the minimax priciple, first we make row minimum and column maximum, then find out the max of row minimum and min of column maximum, we get the optimum value of the game.

Now when both the player make an advertisement then both have a loss $1 million, but as per the minimax principle that is the value of the game,( as this is row minimum and column maximum). Therefore this is the optimum strategies for the game and the value of the game is -$1 million.