Question

M2 Corp. and 3N Co. are rivals and must independently decide on spending for advertising. Each can spend either $10M or $20M on advertising their respective substitute products. If the firms spend equal amounts, they each earn revenues equal to 50% of the $120M total market. If one firms spends $20M and the other spends $10M, the former firm captures two-thirds of total market sales and the latter, one-third.

a. What are each firm's profits by advertising level in the following table.

Profits		3N	3N
		$10M	$20M
M2	$10M	?,?	?,?
M2	$20M	?,?	$40M, $40M

b. If M2 Corp. and 3N Co. act independently, explain what advertising level each will choose and why.

d. Suppose product differentiation successfully keeps a firm's customers so that if one firms spends $20M and the other spends $10M, the former firm captures only 55% of total market sales and the latter, 45%. In essence, the own-advertising elasticity of demand for each firm falls.   If the firms spend equal amounts, they still earn revenues equal to 50% of the $120M total market. Does this change your answer to b. above? Explain why or why not.

Answer 1

a)

profits		3N	3N
		$10M	$20M
M2	$10M	$40M, $40M	$60, $30
M2	$20M	$30,$60	$40M, $40M

b) If M2 Corp. and 3N Co. act independently, then 3N and M2 would go for $20M as they would earn a profit of $60

d) if product differentiation successfully keeps a firm's customers so that if one firms spends $20M and the other spends $10M, the former firm captures only 55% of total market sales and the latter, 45%. then-

profits		3N	3N
		$10M	$20M
M2	$10M	$40M, $40M	$46, $44
M2	$20M	$44,$46	$40M, $40M

In this scenario if M2 and 3N works independently then they would go still go for $20 irrespective of what other company is spending as the profits will be either more or atleast not on the loss side in both situation of what competitor selects.