1. The advertisers dilemma is that both firms would be better if ______ advertises, but each has...

1. The advertiser’s dilemma is that both firms would be better if ______ advertises, but each has an incentive to ______.

2. The advertisers dilemma shown in Figure occurs when advertising causes a relatively ______ increase in the total sales of an industry.

3. Consider a duopoly with two firms managed by Huck and Stella. A standard advertising campaign has a cost of $5 million per firm. If both firms run a standard campaign, the net revenue from sales increases by $4 for each firm. If only one firm runs a campaign, the advertiser s net revenue from sales increases by $8 million, and the other firms net revenue from sales decreases by $7 million. Fill in the blanks in the following table, draw a game tree, and predict the outcome of the advertising game.

4. In Figure, rectangle 2 is not a Nash equilibrium because if ______ advertises, the best response of______ is to______.

5. Automobile Advertising. Consider two automobile companies that are considering advertising campaigns. If neither firm advertises, each will earn net revenue of $5 million. If each spends $10 million on advertising, each firm’s net revenue will be $12 million. If one advertises and the other does not, the firm that advertises will earn $17 million in net revenue, while the firm that does not will earn $1 million. Draw a game tree and predict the outcome. From the industry perspective, do the benefits of advertising exceed the costs?
6. Got Milk? Bessie and George are milk producers, and each must decide whether to spend $7 million on an advertising campaign. If neither advertises, each will earn $10 million in net revenue from sales (net revenue). If both advertise, each will earn $20 million in net revenue and $13 million in profit ($20 million minus $7 million for advertising). If only one producer advertises, that firm will earn $16 million in net revenue, and the other firm will earn $15 million in net revenue. Prepare a game tree like Figure 27.11 on page 593. Assume that Bessie decides first. What is the outcome of this advertising game? If there is an advertiser’s dilemma, how does it differ from the advertisers dilemma discussed earlier in the chapter? How might the dairy industry solve thisdilemma?

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Prolit (S millions Adeline Vem $6 $6 Vern or not Not advertise Adeline Vem $10 Adcline Advertise or TeN Not advertise Adeline Vem SI0 Advertise $5 Verm Advertise or not Not advertise Adeline Vem 58 S8 Neither Advertises Both AdvertiseHuck Advertises Huck S uck Stlla Hck Stella Net revenue $10 from sales ($ million) Cost of advertising $ milion) Profit (S million) S10 0 0 Prolit S millions) Adeline Vem $6 Advertive S6 Vern Advertisc Advertise or notNot advertise Adeline Vern $5 Adeline Advertise or not Not advertise Adeline Ven S10 Advertise $5 Vern Advertise or not Not advertise Adeline Ven $8 S8