Question

Firm A (Alistair's) and Firm B (Baine's) are the only firms selling luggage in the upscale town of Adelaide. Each firm must decide on whether to increase its advertising spending to compete for customers. If one firm increases its advertising budget but the other does not, then the firm with the higher advertising budget will increase its profit. The table below shows the payoff matrix (the profits are in millions of dollars) for this advertising game.

Alistair's (A) Choices Increase Leave advertising budget advertising budget as is Increase advertisingA: $30,000 profi A: $10,000 profit budget B: $30,000 profitB: $50,000 profit Baine's (B) Choices Leave advertisingA: $50,000 prof budget as is A: $40,000 profit B: $10,000 proB: $40,000 profit

1. Find the Nash Equilibrium using the 3 step process – reasoning, strategies, payoffs.

2. The above game was played only once, hence the players did not cooperate. If the game was repeated many times in the future, would the Nash Equilibrium be different? Explain.

Answer 1

Page No Cu ノづ Can be