Find the solution to the following advertising decision game between Coke and Pepsi, assuming the firms act independently.
Pepsi's budget
Low Medium High
Low 400; 400 320; 720 560; 600
Coke's
budget Medium 500; 300 450; 525 540; 500
High 375; 420 300; 378 525; 750
Problem 1.
a. Does Coke have a dominant strategy? If yes, what is it?
b. Does Pepsi have a dominant strategy? If yes, what is it?
c. What is the likely outcome of this advertising decision problem? Verify that your answer is a Nash equilibrium by explaining why it is strategically stable.
d. Pepsi's highest payoff occurs when Coke and Pepsi both choose high ad budgets. Explain why Pepsi will not likely choose a high ad budget.
Problem 2. What is tacit collusion? How would the behavior of the firms differ from that of members of a cartel? Why would tacit collusion exist?