Two restaurants, in a small town, compete in the market for pizza. Each restaurant must decide whether to advertise or not. The potential monthly profits for these firms are shown below (in thousands of dollars).
FIGURE 10-5

-Referring to Figure 10-5, what is the cooperative outcome?

Question

Two restaurants, in a small town, compete in the market for pizza. Each restaurant must decide whether to advertise or not. The potential monthly profits for these firms are shown below (in thousands of dollars).
FIGURE 10-5
 
-Referring to Figure 10-5, what is the cooperative outcome?

Quizplus · Accepted Answer

The cooperative outcome is achieved when both restaurants do not advertise. In this case, both firms earn a profit of $8,000, which is the highest joint profit achievable. It is important to note that if one firm advertising, the other firm will choose to advertise in order to not lose market share, leading to a Nash equilibrium where both firms advertise and earn a profit of $5,000 each, which is lower than the cooperative outcome. Therefore, the best choice for both firms is to not advertise and achieve the cooperative outcome.

Two Restaurants, in a Small Town, Compete in the Market