The breakfast cereal industry is heavily concentrated. Kellogg, General Mills, General Foods (Post) and Ralcorp account for over 85 per cent of industry sales. Advertising by individual firms does not convince more people to eat breakfast. Effective advertising simply steals sales from rivals. Big profit gains could be had if these rivals could simply agree to stop advertising. Assume Kellogg and General Mills are trying to set optimal advertising strategies. Kellogg can choose either row in the payoff matrix defined below, whereas General Mills can choose either column. The first number in each cell is Kellogg€™s payoff; the second number is the payoff to General Mills. This is a one-shot, simultaneous-move game and the first number in each cell is the profit payoff to Kellogg. The second number is the profit payoff to General Mills.

A. Briefly describe the Nash equilibrium concept.
B. Is there a Nash equilibrium strategy for each firm? If so, what isit?

Transcribed Image Text:

General Mills Competitive Strategy Advertise (Up) Don't Advertise (Down') Advertise Don't Advertise (Left") (Right") Kellogg S800 milion, S800 mion S1.5 bilion, S600 million S600 million, S1.5 billion S1 billion, S1 billion