Coca-Cola and Pepsi both advertise aggressively, but would they be better off if they didn't? Their commercials are usually not designed to convey new information about their products. Instead, they are designed to capture each other's customers. Construct a payoff matrix using the following hypothetical information:
- If neither firm advertises, Coca-Cola and Pepsi both earn profits of $750 million per year.
- If both firms advertise, Coca-Cola and Pepsi both earn profits of $500 million per year.
- If Coca-Cola advertises and Pepsi doesn't, Coca-Cola earns profits of $900 million and Pepsi earns profits of $400 million.
- If Pepsi advertises and Coca-Cola doesn't, Pepsi earns profits of $900 million and Coca-Cola earns profits of $400 million.
a. If Coca-Cola wants to maximize profit, will it advertise? Briefly explain.
b. If Pepsi wants to maximize profit, will it advertise? Briefly explain.
c. Is there a Nash equilibrium to this advertising game? If so, what is it?