Question

5) Game Theory (6 points) Suppose AT&T and T-Mobile are deciding whether to increase ad spending to promote their 4G LTE networks. If both companies increase ad spending, they will each earn $2 million in profit. If both leave ad spending the same, they will each earn $3 million in total profit. If one firm increases spending and the other leaves theirs the same, the firm which increases spending will earn new customers and increase profits to $4 million, while the other firm will be left with just $1 million. a) Who are the players in this game? What are their strategies? b) Draw a decision matrix showing the players, strategies, and payoffs. c) Do the players have dominant strategies? If so, what are they? d) What will be the outcome of this game? Is there a Nash Equilibrium? e) Is there incentive for AT&T and T-Mobile to collude? Why or why not?

Answer 1

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