Consider two cigarette companies, PM Inc, and Brown Inc. If neither company advertises, the two companies split the market and earn $60 million each. Ifr they both advertise, they again split the market, but profits are lower by $20 million since each company must bear the cost of advertisirtg. Yet if one company advertises while the other does not, the one that advertises attracts customers from the other. In this case, the company that advertises earns $70 million while the company that does not advertise earns only $30 million. What will these two companies do if they behave as individual profit maximizers? Neither company will advertise, and PM Inc. earns $60. One company will advertise, the other will not. Brown Inc. earns $70, Both companies will advertise, and PM Inc. earns $40. Both companies will advertise, and PM Inc. earns $60.

Consider two cigarette companies, PM Inc, and Brown Inc. If neither company advertises, the two companies split the market and earn $60 million each. Ifr they both advertise, they again split the market, but profits are lower by $20 million since each company must bear the cost of advertisirtg. Yet if one company advertises while the other does not, the one that advertises attracts customers from the other. In this case, the company that advertises earns $70 million while the company that does not advertise earns only $30 million. What will these two companies do if they behave as individual profit maximizers? Neither company will advertise, and PM Inc. earns $60. One company will advertise, the other will not. Brown Inc. earns $70, Both companies will advertise, and PM Inc. earns $40. Both companies will advertise, and PM Inc. earns $60.

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter15: Strategic Games

Section: Chapter Questions

Problem 5MC

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