If you and your rival plan to hand your business down to your children, and this "bequest" goes on forever, then a Nash equilibrium when the interest rate is zero is for
A)your firm to never advertise.
B)your firm to always advertise when your rival does provided that the interest rate is sufficiently large.
C)each firm to not advertise until the rival does, and then to advertise forever provided the interest rate is sufficiently low.
D)each firm to advertise until the rival does not advertise, and then not advertise forever.

Question

Quizplus · Accepted Answer

In this scenario, since the bequest goes on forever, the firms would have a long-term perspective and would prefer to maintain their market share instead of trying to gain short-term profits. Therefore, the Nash equilibrium would be for each firm to not advertise until the rival does, and then to advertise forever provided the interest rate is sufficiently low. This is because when the interest rate is low, the cost of borrowing money is low, and it makes sense for firms to invest in advertising to maintain their market share. On the other hand, when the interest rate is high, the cost of borrowing money is high, and it may not be worth it for the firms to invest in advertising. Overall, both firms would benefit from this strategy since they would maintain their market share and continue to generate profits for their future generations.

If You and Your Rival Plan to Hand Your Business