(Table: Coke and Pepsi Advertising Game) Look at the table Coke and Pepsi Advertising Game.The soft-drink industry is dominated by Coca-Cola and Pepsi, and each firm spends a lot of money on advertising.Suppose each firm is considering a costly television commercial during halftime of the Super Bowl.The table shows the payoff matrix of profits that each firm would receive from their advertising decision, given the advertising decision of their rival.Profits in each cell of the payoff matrix are given as (Coke, Pepsi).If both firms expect to play this game every year for the foreseeable future, what outcome might result from tacit collusion?

Question

Quizplus · Accepted Answer

If the two firms engage in tacit collusion, they would both choose to not advertise during the Super Bowl. This is because if both firms advertise, they would each earn a profit of $2 million, which is lower than the profit they would earn if neither of them advertised, earning a profit of $3 million each. By not advertising, they can effectively share the market and earn higher profits in the long run.

(Table: Coke and Pepsi Advertising Game) Look at the Table