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. If these two companies collude and agree upon the best joint strategy,
A)neither company will advertise.
B)both companies will advertise.
C)PM Inc. will advertise but Brown Inc. will not.
D)Brown Inc. will advertise but PM Inc. will not.

Question

Scenario 17-4.
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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. If these two companies collude and agree upon the best joint strategy,
A)neither company will advertise.
B)both companies will advertise.
C)PM Inc. will advertise but Brown Inc. will not.
D)Brown Inc. will advertise but PM Inc. will not.

Quizplus · Accepted Answer

If the two companies collude and agree upon the best joint strategy, they will both choose not to advertise. This is because if one company advertises while the other does not, the advertising company earns $60 million while the non-advertising company earns only $30 million. However, if both companies advertise, profits are lower by $10 million for each company. Thus, the best joint strategy for the two companies is to not advertise and split the market, earning $50 million each.

Scenario 17-4. ​

Scenario 17-4.