Question

Consider two cigarette companies, PM Inc. and Brown Inc. If neither company advertises, the two companies split the market and earn $50 million each. If they both advertise, they again split the market, but profits are lower by $10 million since each company must bear the cost of advertising. Yet if one company advertises while the other does not, the one that advertises attracts customers from the other. In this case, the company that advertises earns $60 million while the company that does not advertise earns only $30 million.
If these two companies collude and agree upon the best joint strategy,
a.neither company will advertise.
b.both companies will advertise.
c.PM Inc. will advertise but Brown Inc. will not.
d.Brown Inc. will advertise but PM Inc. will not.

Answer 1

Answer: (A)

If both companies collude and agree on the best joint strategy, then neither of them will advertise.

Explanation:

If PM Inc. and Brown Inc. agree on a strategy that is best for both of them, then they would decide not to advertise as this line of action will earn them both $50 million, which is higher than they stand to earn if they both advertise.