Use the following to answer questions:
-(Table: Coke and Pepsi Advertising Game) Look at the table Coke and Pepsi Advertising Game. The soft-drink industry is dominated by Coca-Cola and Pepsi, and each firm spends a lot of money on advertising. Suppose each firm is considering a costly television commercial during halftime of the Super Bowl. The table shows the payoff matrix of profits that each firm would receive from their advertising decision, given the advertising decision of their rival. Profits in each cell of the payoff matrix are given as (Coke, Pepsi). If both firms expect to play this game every year for the foreseeable future, in the outcome Coke _____ and Pepsi _____.
A) advertises; does not advertise
B) does not advertise; advertises
C) does not advertise; does not advertise
D) advertises; advertises

Question

Use the following to answer questions: 
-(Table: Coke and Pepsi Advertising Game) Look at the table Coke and Pepsi Advertising Game. The soft-drink industry is dominated by Coca-Cola and Pepsi, and each firm spends a lot of money on advertising. Suppose each firm is considering a costly television commercial during halftime of the Super Bowl. The table shows the payoff matrix of profits that each firm would receive from their advertising decision, given the advertising decision of their rival. Profits in each cell of the payoff matrix are given as (Coke, Pepsi). If both firms expect to play this game every year for the foreseeable future, in the outcome Coke _____ and Pepsi _____.
A) advertises; does not advertise 
B) does not advertise; advertises 
C) does not advertise; does not advertise 
D) advertises; advertises

Quizplus · Accepted Answer

In a repeated game scenario, both firms are likely to reach a cooperative equilibrium where neither advertises, maximizing their long-term profits by avoiding the high costs of advertising.

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