Suppose that each of the only two firms in an industry has the independent choice of advertising its product or not advertising.If neither advertises, each gets $10 million in profit; if both advertise, their profits will be $5 million each; and if one advertises while the other does not, the advertiser gets profit of $15 million and the other gets profit of $2 million.According to game theory, the Nash equilibrium is:
A)both may or may not advertise.
B)one will advertise and the other will not.
C)both will advertise.
D)neither will advertise.

Question

Quizplus · Accepted Answer

In a Nash equilibrium, each player's strategy is optimal given the strategy of the other player. If one firm advertises, the best response for the other firm is to also advertise to avoid getting only $2 million. If neither advertises, a firm can increase its profit by advertising. Thus, both firms advertising is the stable outcome where neither has an incentive to deviate.

Suppose That Each of the Only Two Firms in an Industry