Change the profit matrix in Question 1.4 so that each firm gets 2 (instead of 4) if it advertises and the other firm does not. How does that change your answers?

Question 1.4

A small tourist town has two Italian restaurants, Romano€™s and Giardino€™s. Normally both restaurants prosper with no advertising. Romano€™s could take some of Giardino€™s customers by running radio ads, and Giardino€™s could do the same thing. The one-month profit matrix (showing payoffs in thousands of dollars) is: 

a. What is the Nash equilibrium in the static (one-month) game?

b. If the game is repeated indefinitely, can the use of tit-for-tat strategies result in a Nash equilibrium?

c. Does the game have multiple equilibria if it is repeated indefinitely?

d. Would pre-play communication or the Pareto criterion have implications for the repeated game equilibrium?

Transcribed Image Text:

Romano's Don't Advertise Advertise 3 Don't Advertise 3 Giardino's 1 Advertise