To advertise or not to advertise Suppose that Creamland and Dairy King are the only two firms that sell ice cream. The following payoff matrix shows the profit (in millions of dollars) each company will earn depending on whether or not it advertises:

Dairy King
Advertise Doesn't Advertise
Creamland Advertise 10,10 18, 2
Doesn't Advertise 2,18 11,11

For example, the upper right cell shows that if Creamland advertises and Dairy King doesn't advertise, Creamland will make a profit of $18 million, and Dairy King will make a profit of $2 million. Assume this is a simultaneous game and that Creamland and Dairy King are both profit-maximizing firms.

a. If Creamland decides to advertise, it will earn a profit of $ ___ million if Dairy King advertises and a profit of $_ million if Dairy King not advertise.
b. If Creamland decides not to advertise, it will earn a profit of million if Dairy King advertises and a profit of $ million if Dairy King does not advertise.

Suppose that both firms start off not advertising. If the firms act independently, what strategies will they end up choosing?

a. Creamland will choose not to advertise and Dairy King will choose to advertise.
b. Both firms will choose not to advertise.
c. Both firms will choose to advertise.
d. Creamland will choose to advertise and Dairy King will choose not to advertise.

a. If Creamland decides to advertise, it will earn a profit of $10 million if Dairy King advertises and a profit of $18 million if Dairy King not advertise.

b. If Creamland decides not to advertise, it will earn a profit of $2 million if Dairy King advertises and a profit of $11 million if Dairy King does not advertise.

For both firms, if they choose not to advertise and the other firm advertises, they will have a much lower profit than their competitors. Therefore, the dominant strategy for either firm is to advertise since it will at least keep them even with their competitor (if both advertise).

The answer is c. Both firms will choose to advertise.