In January 2011,Coca-Cola and Pepsi agreed to reduce their yearly advertising budgets by $1 million each,and neither firm reneged on the agreement throughout the year.In January 2012,Coca-Cola and Pepsi each announced that its company 2011 profits had increased by $1 million.Which of the following is a likely explanation for this increase?
A) A new entrant in the market caused Coca-Cola and Pepsi to lose substantial market share.
B) The government imposed a punitive tax on both firms for producing a beverage that is a danger to public health.
C) The firms had previously been in a prisoner's dilemma situation where one firm's advertisements were effectively canceling the other firm's advertisements.
D) Coca-Cola drastically reduced the price of its soda relative to the price of Pepsi's soda.
E) Pepsi drastically reduced the price of its soda relative to the price of Coca-Cola's soda.

Question

Quizplus · Accepted Answer

The increase in profits suggests that both firms were able to reduce their advertising budgets without suffering a significant loss of market share or revenue, which implies that the previous situation was a prisoner's dilemma. By cooperating and reducing their advertising spending, both firms were able to boost their profits.

In January 2011,Coca-Cola and Pepsi Agreed to Reduce Their Yearly