Answer:
a) Advertising Not advertising
Advertising $20 million, $20 million $50 million, $9 million
Not Advertising $9 million, $50 million $35 million, $35 million
b) If Laphroaig wants to maximize profit, it will advertise only when Knockando does not advertise.
c) If Knockando wants to maximize profit, it will advertise only when Laphroaig does not advertise.
e) No, there is no dominant strategy for each distiller.
Explanation:
a) A payoff matrix is a visual representation of all the possible strategies and all of the possible outcomes. Below is the payoff matrix for the distillers:
Advertising Not advertising
Advertising $20 million, $20 million $50 million, $9 million
Not Advertising $9 million, $50 million $35 million, $35 million
b) If Knockando does not advertise then Laphroaig gets $50 millions of profit if Laphroaig advertises. If Knockando does not advertise and Laphroaig does not advertise then Laphroaig will get only $35 million. If both do advertise, they both get $20 million. If Knockando does advertise and Laphroaig does not advertise then Laphroaig earns a profit of $9 million. If Laphroaig wants to maximize profit, it will advertise only when Knockando does not advertise.
c) Same conditions as in b) Therefore, If Knockando wants to maximize profit, it will advertise only when Laphroaig does not advertise.
d) No, there is no dominant strategy for each distiller. If the two distillers agree to coordinate their strategy means both of them can decide not to advertise to earn a profit of $35 million per year each which is better than when both advertise.