1-Coca Cola and Pepsi are two large soft drink companies. Combined, these companies control a large market share in the soft drink industry. Both companies currently advertise their sodas on television, and each company earns a profit of $550 million.
If both companies were to stop advertising on television, each would earn a profit of $600 million. If only one company were to stop advertising on television and the other company continued to do so, the company that stopped advertising would earn a profit of $200 million and the company that continued to advertise would earn a profit of $800 million. Assume this is a simultaneous-move game where Coca Cola and Pepsi choose to advertise or choose not to advertise, and Coca Cola and Pepsi cannot collude.
What is a payoff matrix? Explain this concept in your own words and explain why it is used in game theory.
Does Coca Cola have a dominant strategy? If so, how did you find this strategy? (In other words, write a short description about your process of verifying this dominant strategy). In your response be sure to define a dominant strategy in your own words
2-What are the economic profits for each of the market structures in the long run?
How do we know?
Define all economics terms using our course definitions.
