5 To Advertise Or Not To Advertise Suppose That Expresso And Beantown Are The Only Two Firms That Sell Coffee The Foll 1 (27.37 KiB) Viewed 61 times
5 To Advertise Or Not To Advertise Suppose That Expresso And Beantown Are The Only Two Firms That Sell Coffee The Foll 2 (21.2 KiB) Viewed 61 times
5. To advertise or not to advertise Suppose that Expresso and Beantown are the only two firms that sell coffee. The following payoff matrix shows the profit (in millions of dollars) each company will earn depending on whether or not It advertises: Beantown Advertise Doesn't Advertise 18,2 Expresso Advertise Doesn't Advertise 10,10 2, 18 11.11 For example, the upper right coll shows that if Expresso advertises and Beantown doesn't advertise, Expresso will make a profit of $18 million, and Beantown will make a profit of $2 million. Assume this is a simultaneous game and that Expresso and Beantown are both profit maximizing firms million i Beantown advertises and a profit of 5 1f Expresso decides to advertise, it will earn a profit ors advertise million it Beantown does not If Expresso decides not to advertise, it will earn a profit of 5 not advertise. million if Beantown advertises and a profit of 5 million if Beantown does Ir Beantown advertises, Expresso makes a higher profit if it chooses If Beantown doesn't advertise, Expresso makes a higher profit if it chooses
Suppose that both firms start off not advertising. If the firms act independently, what strategies will they end up choosing? Expresso will choose not to advertise and Beantown will choose to advertise. Expresso will choose to advertise and Beantown will choose not to advertise. Both firms will choose to advertise Both firms will choose not to advertise. Again, suppose that both firms start off not advertising. If the firms decide to collude, what strategies will they end up choosing? Expresso will choose to advertise and Beantown will choose not to advertise Both firms will choose to advertise. Expresso will choose not to advertise and Beantown will choose to advertise. Both firms will choose not to advertise
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