Table 17-29
Suppose that two firms, Wild Willy's Wonderdrink (Firm W) and Hyper Hank's Hydration (Firm H), comprise the market for energy drinks. Each firm determines that it could lower its costs and increase its profits if both firms reduced their advertising budgets. But 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 energy drinks, 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 W
Breaks agreement Maintains agreement
and advertises and does not advertise
-Refer to Table 17-29. What is the outcome of this game?
A)Neither Firm W nor Firm H will advertise.
B)Both Firm W and Firm H will advertise.
C)Firm W will advertise but Firm H will not.
D)Firm W will not advertise but Firm H will.

Question

Table 17-29
Suppose that two firms, Wild Willy's Wonderdrink (Firm W) and Hyper Hank's Hydration (Firm H), comprise the market for energy drinks. Each firm determines that it could lower its costs and increase its profits if both firms reduced their advertising budgets. But 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 energy drinks, 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 W
Breaks agreement Maintains agreement
and advertises and does not advertise 
-Refer to Table 17-29. What is the outcome of this game?
A)Neither Firm W nor Firm H will advertise. 
B)Both Firm W and Firm H will advertise. 
C)Firm W will advertise but Firm H will not. 
D)Firm W will not advertise but Firm H will.

Quizplus · Accepted Answer

In a typical game theory scenario like this, both firms will choose to advertise because it is the dominant strategy for both, leading to a Nash equilibrium where both firms end up advertising.

Table 17-29 Suppose That Two Firms, Wild Willy's Wonderdrink (Firm W) and W)