Asked by Steven Andekian on Jun 01, 2024
Verified
The two leading U.S. manufacturers of high performance radial tires must set their advertising strategies for the coming year. Each firm has two strategies available: maintain current advertising or increase advertising by 15%. The strategies available to the two firms, G and B, are presented in the payoff matrix below. 
The entries in the individual cells are profits measured in millions of dollars. Firm G's outcome is listed before the comma, and Firm B's outcome is listed after the comma.
a. Which oligopoly model is best suited for analyzing this decision? Why? (Remember it is illegal to collude in the United States.)
b. Carefully explain the strategy that should be used by each firm. Support your choice by including numbers.
High Performance
The achievement of significantly better outcomes or higher efficiency levels than average benchmarks or expectations.
Advertising Strategies
Tactics and methods used by businesses to promote their products, services, or brand to potential customers effectively.
Payoff Matrix
A table that displays the potential outcomes or payoffs for different strategies in a strategic setting, such as a game or competitive scenario.
- Investigate the consequences of cooperative strategies and the obstacles to preserving collusion in oligopolistic markets.
- Analyze the strategic considerations of firms in oligopoly settings, particularly in terms of pricing and advertising strategies.
Verified Answer
AM
Abbey MorseJun 06, 2024
Final Answer :
a.The Prisoners' Dilemma model is most appropriate for analyzing this situation. We can conclude that the Prisoners' Dilemma is most appropriate because each firm must set its advertising strategy without knowledge of the rival's strategy.
b.Increasing the advertising level is the dominant strategy, since the firm is better off increasing regardless of the rival's action. For example, if Firm B increases, Firm G earns 27 if it increases and 12 if it does not increase. G is better off increasing. If Firm B doesn't increase, Firm G earns 45 by not increasing and 50 by increasing. Again, Firm G is better off to increase. It is obvious that no matter what B does, G is better off to increase. Firm B faces the same situation.
b.Increasing the advertising level is the dominant strategy, since the firm is better off increasing regardless of the rival's action. For example, if Firm B increases, Firm G earns 27 if it increases and 12 if it does not increase. G is better off increasing. If Firm B doesn't increase, Firm G earns 45 by not increasing and 50 by increasing. Again, Firm G is better off to increase. It is obvious that no matter what B does, G is better off to increase. Firm B faces the same situation.
Learning Objectives
- Investigate the consequences of cooperative strategies and the obstacles to preserving collusion in oligopolistic markets.
- Analyze the strategic considerations of firms in oligopoly settings, particularly in terms of pricing and advertising strategies.