Consider the following information about Kellogg and General Mills, two breakfast cereal makers, regarding their advertising strategies: If neither firm advertises, each will increase its profit by $2 million. If one advertises and the other doesn't, the firm that advertises will increase profit by $5 million, and the other firm's profits will fall by $2 million. If both firms advertise, profit for each will decline by $1 million.
1) What is the Nash equilibrium in this situation? What will happen to the profits of the firms?
2) What is the solution if the firms are able to cooperate successfully? What happens to profits in this situation? Why is this cooperation difficult to maintain? What might make it easier