Question: Suppose that a seller in a duopoly needs to decide whether to spend a lot or a little on advertising. Assume that the consumers are already reasonably well informed about the product, so the purpose of a lot of advertising is to draw customers away from the rival. How could the payoffs from this situation resemble those in Figure? Draw a payoff matrix illustrating this case (with options "spend a lot" or "spend a little" and outcomes of low, moderate, or high profits) and describe the non cooperative solution. What if the government decided to ban advertising in this industry (as it has, in the past, banned advertising of cigarettes and alcohol in various media)? Would that help or hurt the companies' profits?
