Question

4. (10 points) At cereal a time maker when Kellogg's demand was for ready-to-eat cereal was stagnant, a spokesperson for the cereal maker Kellogg's was quoted as saying, “.....for the past several years, our individual company growth has come out of the other fellow's hide." Kellogg's has been producing cereal since 1906 and continues to implement strategies that make it a leader in the cereal industry. The payoff matrix for Kellog and its rival to advertise or "don't advertise" is given below Kellogg's Rival Advertise Don't Advertise Advertise (0,0) (52,-4) Kellogg Don't (-4, 52) (12, 12) Advertise (a) If this were a simultaneous move one shot game, what would the Nash equilibrium outcome be? Please explain. (b) Assuming that the game is still played once, if the firms could collude, what would the collusive outcome be, assuming that they made a collusive agreement and followed the agreement. Please explain. (c) Now suppose the game is infinitely repeated. If the interest rate is 35 percent, can you do better than you could in a one-shot play of the game using a trigger strategy? Explain. II

Refers to gametheory strategy

Answer 1

Kellogg adu. 0,0 Don't Ado. 52, 4 Kellog Adwerksi Don't Alwi 12, 12 a) (Advertisi Advertis) is a Naash ray of the the game is played only Once then Collussion can't be achieves. & both will 'Advertisi" c) of 35% with interest rate Expected payoff 12 t. 12 12 12 (1035) 46.2857 t12 1-35 1.35 from cooperation T 135 0.35 =52 Deviaren Exp payoff from a 52 totot- Thus it is Beneficial for foren and this Actress Adverksi- not to collech not be Both will collude & they will better off then one shot game