Scenario 17-4.

Consider two cigarette companies, PM Inc. and Brown Inc. If neither company advertises, the two companies split the market and earn $50 million each. If they both advertise, they again split the market, but profits are lower by $10 million since each company must bear the cost of advertising. Yet if one company advertises while the other does not, the one that advertises attracts customers from the other. In this case, the company that advertises earns $60 million while the company that does not advertise earns only $30 million.
-Refer to Scenario 17-4. The likely outcome of this game is that PM Inc. earns
A)$30 million and Brown Inc. earns $60 million.
B)$40 million and Brown Inc. earns $40 million.
C)$50 million and Brown Inc. earns $50 million.
D)$60 million and Brown Inc. earns $30 million.

Question

Scenario 17-4.
​
Consider two cigarette companies, PM Inc. and Brown Inc. If neither company advertises, the two companies split the market and earn $50 million each. If they both advertise, they again split the market, but profits are lower by $10 million since each company must bear the cost of advertising. Yet if one company advertises while the other does not, the one that advertises attracts customers from the other. In this case, the company that advertises earns $60 million while the company that does not advertise earns only $30 million.
-Refer to Scenario 17-4. The likely outcome of this game is that PM Inc. earns
A)$30 million and Brown Inc. earns $60 million.
B)$40 million and Brown Inc. earns $40 million.
C)$50 million and Brown Inc. earns $50 million.
D)$60 million and Brown Inc. earns $30 million.

Quizplus · Accepted Answer

The likely outcome is that both companies will choose to advertise, as advertising is a dominant strategy for both. This results in each company earning $40 million after accounting for the cost of advertising.

Scenario 17-4. ​

Scenario 17-4.