If you advertise and your rival advertises, you each will earn $4 million in profits. If neither of you advertises, you will each earn $10 million in profits. However, if one of you advertises and the other does not, the firm that advertises will earn $1 million and the non-advertising firm will earn $5 million. Which of the following is true?
A) A dominant strategy for firm A is to advertise.
B) A dominant strategy for firm B is to advertise.
C) A Nash equilibrium is for both firms to advertise.
D) None of the answers is correct.

Question

Quizplus · Accepted Answer

There is no dominant strategy for either firm as the best option depends on the other firm's decision. If Firm A advertises, Firm B is better off advertising as well, but if Firm A does not advertise, Firm B is better off not advertising. Similarly, if Firm B advertises, Firm A is better off advertising as well, but if Firm B does not advertise, Firm A is better off not advertising. This leads to a Nash equilibrium where both firms do not have a dominant strategy and the outcome depends on their mutual decision.

If You Advertise and Your Rival Advertises, You Each Will