Chapter 17 - 5. To advertise or not to advertise

Suppose that two firms, Frankencakes and Thinley's, are the only sellers of crepes in some hypothetical market. The following payoff matrix gives the profit (in millions of dollars) earned by each company depending on whether or not it chooses to advertise: Thinley's Advertise Doesn't Advertise Advertise 10, 10 13, 2 Frankencakes Doesn't Advertise 2, 13 11, 11 For example, the lower left cell of the matrix shows that if Thinley's advertises and Frankencakes does not advertise, Thinley's will make a profit of $13 million, and Frankencakes will make a profit of $2 million. Assume this is a simultaneous game and that Frankencakes and Thinley's are both profit- maximizing firms. If Frankencakes chooses to advertise, it will earn a profit of $ million if Thinley's advertises and a profit of $ million if Thinley's does not advertise. If Frankencakes chooses not to advertise, it will earn a profit of $ million if Thinley's advertises and a profit of $ million if Thinley's does not advertise. If Thinley's advertises, Frankencakes makes a higher profit if it chooses If Thinley's doesn't advertise, Frankencakes makes a higher profit if it chooses Suppose that both firms start off by deciding not to advertise. If the firms act independently, what strategies will they end up choosing? O Both firms will choose to advertise. Frankencakes will choose not to advertise and Thinley's will choose to advertise. O Both firms will choose not to advertise. Frankencakes will choose to advertise and Thinley's will choose not to advertise.Again, suppose that both firms start off not advertising. If the firms decide to collude, what strategies will they end up choosing? Frankencakes will choose to advertise and Thinley's will choose not to advertise. O Both firms will choose not to advertise. O Frankencakes will choose not to advertise and Thinley's will choose to advertise. O Both firms will choose to advertise