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In response to government concern over social norms, suppliers of high content alcoholic beverages like whiskey and vodka refrained from advertising on television
In response to government concern over social norms, suppliers of high content alcoholic beverages like whiskey and vodka refrained from advertising on television. Industry spokesmen claimed that the voluntary ban was evidence of socially responsible behavior on the part of the industry. However, economists quickly pointed out that the multilateral decision to refrain from advertising saved all firms millions in advertising costs. The table below illustrates potential profits for duopolists in this industry, Oak River Bourbon and Old Mami Select Bourbon. a. Is there a dominant strategy and Nash equilibrium? Explain. b. Given this information, did these firms agree to the voluntary ban solely for the sake of social responsibility? Is this agreement likely to be sustained? Explain. AB Old Mami Advertise No Advertising Oak River Advertise 8110 2015 No Advertising
Expert Solution
The pay-off matrix of the game can be written as :
| Advertise. (q) | No Advertising. (1-q) | |
| Advertise. (p) | 8 , 10 | 20 , 5 |
| No Advertising. (1-p) | 7 , 28 | 25 , 30 |
Oak River is the row player while Old Mami is the column player. The first term of each cell represents the pay-off of Oak River from a particular strategy while the second term of each cell represents the pay-off of Old Mami.
We indicate the optimal choices by underlinning them.
- When Oak River chooses to Advertise , Old Mami also chooses to Advertise because this gives them a higher pay-off. (10>5)
- When Oak River chooses not to advertise , Old Mami chooses not to advertise. (30>28)
- When Old Mami chooses to Advertise , Oak River also chooses to Advertise. (8>7)
- When Old Mami chooses not to advertise , Oak River chooses not to advertise. (25>20)
Clearly , none of the two players have a strictly dominant strategy.
a. The 2 pure-strategy Nash Equilibria are :
( Advertise , Advertise) and (Don't Advertise , Don't Advertise ). And the pay-offs are respectively (8,10) and (25,30)
b. The firms didn't agree to the ban purely out of social responsibility. Agreeing to the ban and not advertising gave them higher payoffs than what they would have got , had there been no ban. If there was no ban , each firm would think that the other will advertise , and will themselves end up advertising as a best response to the other firm's action. And the Nash Equilibrium will be at (Advertise , Advertise) , giving them pay-offs of (8,10).
However , the ban from advertising gives them a higher pay-off of (25, 30). Thus both of them benefit from agreeing to the ban. They agree to the ban not only because of social responsibility but also because of the higher pay-off.
Yes , the agreement is likely to be sustained in the presence of a ban. However if the ban is lifted , each firm would go back to advertising (explained above) , earning lesser payoffs.
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