Question

Table 13-1 Alistair's (A) Choices Increase advertising budget Leave advertising budget as is Increase advertising budget A: $30,000 profit B: $30,000 profit A: $10,000 profit B: $50,000 profit Baine's (B) Choices Leave advertising budget as is A: $50,000 profit B: $10,000 profit A: $40,000 profit B: $40,000 profit

• What is the Nash equilibrium in this game?

A) Alistair increases its advertising budget, but Baine does not.

B) Baine increases its advertising budget, but Alistair does not.

C) Both Alistair and Baine increase their advertising budgets.

D) There is no Nash equilibrium.

• How are the firms in this advertising game caught in a prisoner's dilemma?

A) They are not in a prisoner's dilemma because there is one clear strategy for each

B) They would be more profitable if they refrained from advertising but each fears that if it does not advertise, it will lose customers.

C) Since each firm is uncertain about the other's behavior, each will adopt a wait-and-see attitude which results in no increase in market share and no new customers.

D) Only the first mover is caught in a prisoner's dilemma because the second has a chance to observe and respond.

Answer 1

The Nash Equilibrium for this game can be calculated using the underline method :

A Theriace ( 301000, 301000 T increase C 501000, 10,000) I leave To Prodo, 50.000 1 IC 40,000), (40.000)| the Budget would lie to increase it when B chooses to increase Best Response from Canduwine 30,006) when & chooses to leave it as is, I would

it as his Day Response By choose to (underline increase 501000) = a dominant strategy i.e. Increase their H Has Budget : - similarly B's chosen by - Budget." Best Response to A would be to Cris Dominant any strategy increase His stategy

Hence, the Nash Equilibrium of the game would be C) Both increase their advertising budget.

Prisoner's Dilemma is a situation in which two individuals don't produce an optimal outcome even when they are acting as per their Best Responses.

Here , The game represents Prisoner's Dilemma because B) They can both be better off by refraining from advertising [Because (40,000 40,000) > (30,000 30,000)] but each fears that if they don't advertise they would lose their customers.

Option c) and D) can not be the right answers because the game is being played simultaneously and option A) can not be a correct answer as there is definitely a situation of Prisoner's Dilemma as per its definition.