Two competitive firms are located side by side.If firm A advertises,firm B will get new customers too,even though it does not have to pay for the advertising cost.The same scenario is true for A if B advertises.If both advertise,the amount of extra revenue generated would just offset the advertising costs.In such case,game theory suggests
A) that only A will advertise.
B) that only B will advertise.
C) that both A and B will advertise.
D) that neither A nor B will advertise.
E) nothing in terms of predicting the outcome of the game.

Question

Quizplus · Accepted Answer

In this scenario, both firms have a dominant strategy of not advertising. This is because even if one firm advertises, the other firm will benefit without having to pay the cost. If both firms advertise, they will only incur the cost without any additional revenue, which is not in their best interest. Therefore, the best option is for neither firm to advertise. This is an example of a "Prisoner's Dilemma" game in which both firms have a dominant strategy of not advertising even though it may not result in the best overall outcome.

Two Competitive Firms Are Located Side by Side