Assume that IBM and Dell Computer have a large inventory of personal computers that they would like to sell before a new generation of faster, cheaper machines is introduced. Assume that the question facing each competitor is whether or not they should widely advertise a Aclose out@ sale on these discontinued items, or instead let excess inventory work itself off over the next few months. If both aggressively promote their products with a nationwide advertising campaign, each will earn profits of $5 million. If one advertises while the other does not, the firm that advertises will earn $20 million, while the one that does not advertise will earn $2 million. If neither advertises, both will earn $10 million. Assume this is a one-shot game, and both firms seek to maximize profits.

	Dell Computer
IBM	Promotion Strategy	Advertise	Don=t Advertise
	Advertise	$5 million, $5 million	$20 million, $2 million
	Don=t advertise	$2 million, $20 million	$10 million, $10 million

A. What is the dominant strategy for each firm?

B. What is the Nash equilibrium?

C. Would collusion work in this case?

Answer rating: 100% (QA)

Answer i The dominant strategy for both IBM and Dell is to advertise Neither could earn higher profi... View the full answer