Table 11.3 Firm A(Alistair's)and Firm B (Baine's)are the only firms selling luggage in the upscale town of Adelaide.Each firm must decide on whether to increase its advertising spending to compete for customers.If one firm increases its advertising budget but the other does not, then the firm with the higher advertising budget will increase its profit.Table 11.3 shows the payoff matrix for this advertising game.
-Refer to Table 11.3.How are the firms in this advertising game caught in a prisoner's dilemma?

Question

Table 11.3  Firm A(Alistair's)and Firm B (Baine's)are the only firms selling luggage in the upscale town of Adelaide.Each firm must decide on whether to increase its advertising spending to compete for customers.If one firm increases its advertising budget but the other does not, then the firm with the higher advertising budget will increase its profit.Table 11.3 shows the payoff matrix for this advertising game.
-Refer to Table 11.3.How are the firms in this advertising game caught in a prisoner's dilemma?

Quizplus · Accepted Answer

Both firms would be more profitable if they refrained from advertising, but each fears that if it does not advertise, it will lose customers. This is a classic example of a prisoner's dilemma where both firms have a dominant strategy of advertising, but the Nash equilibrium results in both firms having lower profits due to the increased advertising expenses.

Table 113 Firm A(Alistair's)and Firm B (Baine's)are the Only Firms