Airtel and MTN are engaged in a battle to win customers from a saturated market of mobile users. Historically, they both know that intensive advertising can help them win customers from other operators even though advertising is expensive. So, each firm has to decide whether to choose a high level of advertising (H) or a low level of advertising (L). If both firms choose a high level of advertising, the advertisement campaigns will simply offset each other and each firm earns a profit of GHC 5 million. If both firms choose a low level of advertising each earns a profit of GHC 12 million. If one firm chooses high advertising and the other firm chooses a low level of advertising, the firm that chooses high advertising gets a profit of GHC18 million and the firm with low advertising gets at a profit of GHC 2 million. 

a) Describe the game in the normal form. 

b) Does either firm have a dominant strategy? If so, what is this strategy? 

c) Identify all the pure strategy Nash equilibria for this game. 

d) If MTN and Airtel play this game infinitely many times, at an interest rate of 10%, can the cooperative outcome that gives each firm a profit of GHC 12 million be sustained? Explain.

Answer rating: 100% (QA)

Answer a The game can be described in the normal form as follows AirtelMTN High Advertising H Low Ad... View the full answer