Question 14 (7 marks)

a.The Australian supermarket industry is dominated by two firms; Coles and Woolworths. Assume the supermarket market is worth $30 billion per year. This is stable year on year regardless of the level of marketing activity. Market share is 50/50 between the two firms. Neither firm currently spends any money on advertising. The cost of marketing activity is $5 billion for any firm. Assume that if both firms advertise that market share remains the same, but if one firm advertises and the other doesn't that market is 70/30 with the advertiser gaining more sales.

Draw the payoff matrix to show profit results for all possible outcomes. (4 marks)

1. The game described in part b) is characterised by simultaneous moves. Is there a Nash equilibrium? If so, what is it and why?(2 marks)
2. Is the equilibrium payoff outcome a Prisoner's dilemma? Explain.(1 mark)