Chapter 13, Problem 1E

A.

To determine

To Draw: The pay-off matrix based on the given data.

Answer to Problem 1E

The payoff matrix can be observed in the later section.

Explanation of Solution

It is given that there are two firms in the market. And there are two given promotion kinds for the firms. Of this given data, the payoff matrix can be postulated as follows:

		Firm H
		Extensive Promotion	Low Promotion
Firm T	Extensive Promotion	$5 Million, $5 Million	$9 Million, $4 Million
	Low Promotion	$4 Million, $9 Million	$7.5 Million, $7.5 Million

Economics Concept Introduction

Introduction: A tool that can be used to simplify and present all the possible outcomes that pop up from a strategic decision is called payoff matrix.

B.

To determine

To describe: On the given condition, propose a principal advertising strategy and minimum payoff for the former company.

Answer to Problem 1E

For any given strategy of later company, the principal advertising strategy for the former company is extensive promotion.

Explanation of Solution

As said, it is the extensive promotion that is principal advertising strategy for the former, because the firm’s payoff is higher under extensive promotion when compared to low promotion, for a given strategy of the later.

Supposing the former’s strategy is extensive promotion, the payoff will be $5M and the latter’s strategy is extensive promotion. Similarly, the payoff will be $9M when the latter’s strategy is low promotion.

By observing the above results, it can be concluded that the minimum payoff of the former company is $5M.

Economics Concept Introduction

Introduction: A tool that can be used to simplify and present all the possible outcomes that pop up from a strategic decision is called payoff matrix.

C.

To determine

To describe: The principal advertising strategy and minimum payoff for the latter company.

Answer to Problem 1E

Since the game can be observed as being symmetric for both the companies, it can be concluded that the principal advertising strategy of extensive promotion and a minimum payoff of $5M, for both the companies.

Explanation of Solution

By observing the payoff matrix or the given data of the two companies, it can be said that the companies are having a symmetric game. Thus, similar to the former company, the latter is also proposed to have an extensive promotion and a minimum payoff of $5M.

Economics Concept Introduction

Introduction: A tool that can be used to simplify and present all the possible outcomes that pop up from a strategic decision is called payoff matrix.

D.

To determine

To describe: The reason firms involved may decide not to play their principal strategies.

Answer to Problem 1E

The proper explanation with the intended decisions of the firms involved in the game on the following of the given condition is given in the next section.

Explanation of Solution

On the condition that the game is repeated in multiple decision-making periods, the firms involved in the game may choose to signal the other firm for readying it to cooperate for making the future stream of profits higher. Hence, it can be concluded that the firms involved in the game may not prefer to play their principal strategies while this game is being repeated in multiple decision-making periods.

Economics Concept Introduction

Introduction: A tool that can be used to simplify and present all the possible outcomes that pop up from a strategic decision is called payoff matrix.