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, 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 both firms advertise, neither can increase their profit by unilaterally changing their strategy, as not advertising would reduce their profit from $5 million to $2 million. Thus, both advertising is the Nash equilibrium.

Suppose That Each of the Two Firms in a Duopoly