ECON625

LEARNING OBJECTIVES (L01, LO2, LO3) GAME THEORY INSIDE OLIGOPOLY

1. Suppose there is a small town with two high-end restaurants. Suppose additionally that a major convention is coming to town. The restaurants are deciding whether to create print advertising to distribute at the convention in order to advertise their restaurant.
   • If they both advertise, the advertising will cancel and both restaurants will get the same amount of business as if they had not advertised, so the advertising expense will have been wasted,
   • If they both choose not to advertise, they will save the cost of advertising.
   • If one advertises and the other does not, the advertising restaurant will pull business away from its competitor and will end up with higher revenue.

The payoff matrix is below.

Restaurant A Don't Advertise A's Economic Prot A's Economic Prot = o = -$3000 B's . . . Economic Prot = o B 5 Ewngrg'acupumo I s E A's Economic Prot A's Economic Prot 3 = 33000 = $1000 . 5 3'5 Economic Prot ' ' a -53000 Economic Prot I 51000 In 'E E 3 5 3 t: Is there a dominant strategy for Restaurant A? Is there a dominant strategy for Restaurant B? If there is a dominant strategy, is it prot-maximizing? Is this a Nash equilibrium? Explain. If the convention planners sign a 5-year contract ensuring that they will be back each year, will the advertising decisions be different? Explain