Assume the beverage industry consists of two similar companies only, Coca-Cola and PepsiCo. There is a fixed market demand for the drinks they produce. Originally, the two companies share the market evenly. They face a choice between actions, to compete and spend on advertising, or to stay where they are without advertising. Though advertising is costly, it helps build awareness of the company’s products, encourages sales and increases the market share gained. If both choose to advertise, they share the market evenly. Analyse the strategic interaction between the two companies using game theory. Represent the situation in a payoff matrix. Explain how you assign the values of payoffs to different actions. Analyse the payoff matrix for Nash equilibrium. What can both companies do to make their jointly preferred outcome more likely?

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The two dominant companies in the market for carbonated soft drinks and beverages are PepsiCo Inc and The CocaCola Corporation The nonalcoholic beverage category includes carbonated soft drinks Juice ... View the full answer