Suppose that each of the two firms in a duopoly has the independent choice of advertising 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,if the firms collude to maximize joint profits:
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

If the firms collude to maximize joint profits, it is in their best interest to not advertise. This is because if one firm advertises while the other does not, the advertiser gets a higher profit but the other firm gets a very low profit. Thus, to avoid this outcome and maximize joint profits, both firms would choose not to advertise and each receive $10 million in profit.

Suppose That Each of the Two Firms in a Duopoly