Suppose that each of two firms has the independent choice of advertising its product or not advertising.If neither advertises, each gets $10 million in profit; if both advertise, their profits will be $5 million each; and if one advertises while the other does not, the advertiser gets $15 million profit while the other gets $2 million profit.According to game theory, the likely strategy by the firms is:
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

Given the scenario, advertising is the dominant strategy for both firms. If one firm advertises and the other doesn't, the advertiser gains more profit. If both advertise, they still secure a profit, albeit lower, but avoid the worst-case scenario of not advertising while the other does. Thus, rational firms will choose to advertise, leading to both advertising.

Suppose That Each of Two Firms Has the Independent Choice