Table 17-28

Suppose that two firms determine that each could lower its costs and increase its profits if both reduced their advertising budgets. But in order for the plan to work, each firm must agree to refrain from advertising. Each firm believes that advertising works by increasing the demand for the firm's product, but each firm also believes that if neither firm advertises, the cost savings will outweigh the lost sales. The table below lists each firm's individual profits:

Firm A Breaks agreement Maintains agreement and advertises and does not advertise Breaks Firm A's profit = Firm A's profit = agreement $16,000 $14,000 and advertises Firm B's profit = Firm B's profit = Firm B $6,000 $10,000 Maintains Firm A's profit = Firm A's profit = agreement $24,000 $22,000 and does not Firm B's profit = Firm B's profit = advertise $5,000 $9,000