|
Competitor |
|||
|
Advertise |
Do not advertise |
||
|
Your firm |
Advertise |
1300, 1200 |
2700, 700 |
|
Do not advertise |
900, 2000 |
2400, 1800 |
|
What is the Nash equilibrium of this game?
If you and your competitor could talk on the phone (imagine
it was legal to do so) to coordinate whether to advertise or not,
what would the outcome be?
Given that your firm choose to advertise, competitor's best
response is advertise(1200).
Given that your firm choose to not advertise, competitor's best
response is advertise(2000).
Given that competitor choose to advertise, your firm's best
response is advertise(1300).
Given that competitor choose to not advertise, your firm's best
response is advertise(2700).
Thus, the NE if (Advertise, Advertise) = (1300, 1200) as best
response of both firms occur simultaneously when they
advertise.
If you could talk on the phone, then both will decide to not
advertise because both firms can increase their profits by not
advertising.
So, outcome is (Do not Advertise, Do not Advertise) = (2400,
1800)
Now imagine another scenario in which your company has only 1 competitor. You and your competitor...
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