There are two firms, Cope and Peski, in an oligopolistic industry. Each firm must decide whether or not to advertise during the Super Bowl this year. The diagram below represents the matrix of expected profit payoffs for each firm depending on which of the four possible outcomes becomes reality. The first number in each cell represents the expected profit for Peski given the combination of strategies for each firm. The second number in each cell represents the expected profit for Cope given the combination of strategies for each firm.
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$225 mil.; $260 mil.
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$190 mil.; $240 mil.
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$200 mil.; $250 mil.
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$240 mil.; $280 mil.
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1. In Game Theory, a secure or safe strategy is when a firm chooses the strategy that avoids the possibility of the worst possible payoff. (Note; this is not the same as the average expected payoff, but the problem is similar to the Prisoner's Dilemma.)
Assuming both firms pursue a safe strategy, what strategy will each firm pursue and what level of profits will each firm actually earn? Make sure to reference the payoff matrix in your answer.
2. Evaluate the following statement: "Government regulators should impose price ceilings on the electricity sold by public utilities, since this will increase demand and encourage greater competition."