Question

There are two firms, Cope and Peski, in an oligopolistic industry. Each firm must decide whether or not to advertise during the Super Bowl this year.

The diagram below represents the matrix of expected profit payoffs for each firm depending on which of the four possible outcomes becomes reality. The first number in each cell represents the expected profit for Peski given the relevant combination of strategies for each firm. The second number in each cell represents the expected profit for Cope given the relevant combination of strategies for each firm.

	Cope advertises during Super Bowl	Cope does not advertise during Super Bowl
Peski advertises during Super Bowl	$210 mil.; $260 mil.	$220 mil.; $240 mil.
Peski does not advertise during Super Bowl	$200 mil.; $250 mil.	$240 mil.; $280 mil.

  
Assumptions:

Both of these firms act simultaneously and do not cooperate.

Neither Cope nor Peski knows in advance what the other will do.

Each firm has calculated their own expected profit payoffs depending on the four possible outcomes.

Neither firm knows or has calculated their rival's expected profit payoff.

The goal of each firm is to maximize their own expected profits in each play of the game.

Question 1: In Game Theory, a secure or safe strategy is when a firm chooses the strategy that avoids the possibility of the worst possible payoff. (Note; this is not the same as the average expected payoff, but the problem is similar to the Prisoner's Dilemma.)

Assuming both firms pursue a safe strategy, what strategy will each firm pursue and what level of profits will each firm actually earn? Make sure to reference the payoff matrix in your answer.

Question 2: In Game Theory, a firm has a dominant strategy if the firm would always prefer that same strategy as its most profitable strategy, regardless of which strategy their rival chooses, in successive or repeated plays of the game.

Note: this is not the same as the average expected payoff.

Does Cope have a dominant strategy? Make sure to reference the payoff matrix in your answer.

Answer 1