For this question, assume the online retailing market is dominated by two firms. Let's name them Firms AAA and ZZZ. These firms sell a similar line of products and have very similar prices. However, one key strategic tool for each of them is advertising. Assume the two firms each have just two possible advertising strategies: spend a great deal of money on their advertising (High) or spend a modest amount on advertising (Low). If they both choose to have modest (Low) advertising budgets, they each have profits of $900 (equal split of the $1800 maximum monopoly profit). If they both have High advertising budgets, they incur greater costs. So the two companies earn just $675 each in profits. However, if AAA has a Low advertising campaign and ZZZ has a High advertising budget, AAA has profits of $810 while ZZZ has profits of $940. If ZZZ has a Low advertising budget while AAA has a High advertising budget, ZZZ has profits of $565 while AAA has profits of $1,000. For parts (a)-(e) you should assume this is a single-play, non-repeated game. a) Construct a payoff matrix to describe this simple non-cooperative game.

If ZZZ could credibly threaten to run a High advertising budget, what is the maximum it would be willing to pay AAA in order to buy them out of the market (in which case ZZZ will remain the monopolist and collect monopoly profits)? What is the minimum that AAA would be willing to accept to be bought out in this situation? Explain. Please recall that this is a single-play, non-repeated game