Scenario 17-4.
Consider two cigarette companies, PM Inc. and Brown Inc. If neither company advertises, the two companies split the market and earn $50 million each. If they both advertise, they again split the market, but profits are lower by $10 million since each company must bear the cost of advertising. Yet if one company advertises while the other does not, the one that advertises attracts customers from the other. In this case, the company that advertises earns $60 million while the company that does not advertise earns only $30 million.
-Refer to Scenario 17-4. If these two companies collude and agree upon the best joint strategy,

Question

Quizplus · Accepted Answer

If the two companies collude and agree upon the best joint strategy, they should collectively decide not to advertise. This way, they can split the market and earn $50 million each, which is higher than the profit they would earn if both companies advertise and split the market but lower by $10 million due to the cost of advertising. Additionally, if one company advertises while the other does not, it will attract customers from the other, which may result in a decrease in profits for both companies. Therefore, the best choice for these two companies is to collude and not advertise.

Scenario 17-4. Consider Two Cigarette Companies, PM Inc. and Brown Inc. If