A long time ago, Kodak and Fuji the only two firms in the industry of camera film, with identical cost structure were thinking of advertising their product at an exhausting rate, a mild rate and not advertising at all. Assume that currently they share a profit of $54 million each. By advertising at an exhausting rate results in a cost of $60 million and by a mild rate $45 million for each firm. On the other hand revenue for each firm reaches $105 if both advertise mildly and S114 if they advertise exhaustively provided that the other firm doesn’t advertise all. When both firms advertise mildly they get a revenue of $93, and $60 when they advertise exhaustively. In case that one advertises mildly it will get $69 provided that the other will advertise exhaustively. In the case that one advertises exhaustively it will get $96 provided that the other will advertise mildly. When a firm does not advertise at all it will get S45 if the other advertises mildly and S27 when the other advertises exhaustively. (a) Construct the payoff matrix and find whether a dominant strategy exists for cach firm. IMark: 1.01 tb Find the Nash ecuik: 0$) (c) Suppose that Kodak moves first and decides about its advertising plan a month earlier so as to pre-empt Fuji. Kodak approaches a large advertising company and commits to an exhaustive strategy by signing a contract with the advertising company and at the same time making a public announcement of the event. Is this move beneficial to Kodak? Is this a credible strategy? Show in a game tree the Subgame Perfect Nash Equilibrium and comment on your finding. |Mark: 1.0 (d) Despite Kodak’s announcement, Fuji threatens also through a public announcement that it will follow the exhaustive advertising of Kodak. Is this threat by Fuji credible? [Mark 0.5
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