Profits for two competing firms depend on the decisions to advertise or not to advertise as follows: If neither firm advertises, each makes a weekly profit of $100. If one firm advertises while the other does not, the firm that advertises makes $120 while the firm that doesn’t advertise makes $60. If both firms advertise, each firm makes $80. (a) What is the Nash equilibrium? Is this outcome efficient, from the perspective of the two firms? (b) How does the outcome of the game change if the parties can make a binding agreement in advance about advertising practices? (c) How does the game change if it is repeated over the course of many weeks (but the firms cannot make a binding agreement about how much advertising they will do)?
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Profits for two competing firms depend on the decisions to advertise or not to advertise as follows: If neither firm advertises, each makes a weekly profit of $100. If one firm advertises while the other does not, the firm that advertises makes $120 while the firm that doesn’t advertise makes $60. If both firms advertise, each firm makes $80.
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(a) What is the Nash equilibrium? Is this outcome efficient, from the perspective of the two firms?
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(b) How does the outcome of the game change if the parties can make a binding agreement in advance about advertising practices?
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(c) How does the game change if it is repeated over the course of many weeks (but the firms cannot make a binding agreement about how much advertising they will do)?
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