In the 1960s, tobacco producers engaged in fierce battles for market share. The major weapon in that

Question:

In the 1960s, tobacco producers engaged in fierce battles for market share. The major weapon in that war was advertising - advertising that was designed not to attract new smokers, but to lure smokers away from competing brands. Consider the following scenario: There are two tobacco sellers, Phillip and R. J., each of whom can choose to advertise on TV (at a cost of $20 million) or not. There are $100 million of pre-advertising profits available to the two firms. If they both adopt the same budget, they will split the market evenly. If one chooses a high budget while the other chooses low, the high-budget firm will steal half the other's customers and capture $75 million of pre-advertising profit; the other will earn $25 million. The firms' net profits (after advertising expenses are considered) are illustrated in the payoff matrix below:

a. Verify that the payoffs in the table reflect the story told above.
b. What is the Nash equilibrium in this game? Is the equilibrium outcome a good one for anybody?
c. Suppose that Phillip and R. J. promise one another that they will not advertise. Is such a promise credible? Explain.
d. In 1971 the federal government banned cigarette advertising on TV. Initially, tobacco companies protested vehemently. Referring to the game table above, discuss whether Big Tobacco's protests were genuine.