Suppose that Big & Tall and Short & Sweet are two clothing manufacturers and each chooses independently whether to advertise or not advertise. If neither advertises, each gets $100 million in profit; if both advertise, their profits are $50 million each; and if one advertises, while the other does not, the advertiser gets $150 million in profit, and the other gets $20 million in profit. What is the Nash equilibrium?
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 this scenario, each manufacturer wants to maximize its profit. If one manufacturer advertises and the other does not, the advertiser will get a profit of $150 million, which is higher than the profit of $100 million that the manufacturer will get if they both do not advertise. However, if both manufacturers advertise, their profits will be $50 million each, which is still higher than the profit of $150 million and $20 million that the manufacturers will get if one advertises and the other does not.

Therefore, the best choice for each manufacturer is to advertise. This leads to a Nash equilibrium where both manufacturers advertise, and their profits are $50 million each.

Suppose That Big & Tall and Short & Sweet Are