Module 3 – Case
MARKET STRUCTURES
Case Assignment
Explain the Prisoner’s Dilemma game, the notion of dominant
strategy, and the concept of Nash equilibrium and cooperation. Using these
concepts, then, analyze the following duopoly game.
Philip Morris and R.J. Reynolds spend huge sums of money
each year to advertise their tobacco products in an attempt to steal customers
from each other. Suppose each year Philip Morris and R.J. Reynolds have to
decide whether or not they want to spend money on advertising. If neither firm
advertises, each will earn a profit of $2 million. If they both advertise, each
will earn a profit of $1.5 million. If one firm advertises and the other does
not, the firm that advertises will earn a profit of $2.8 million and the other
firm will earn $1 million.
If the two companies decide to collude to maximize profits,
what will each company do? What profit will each company earn?
What is the dominant strategy for each company, and what
profit will each company earn if they follow those strategies?
Is the solution you found in the first question a Nash
equilibrium?
Is the solution you found in the second question a Nash
equilibrium?
Assignment Expectations
In the Module 3 Case Assignment, you are expected to:
Describe the purpose of the paper and provide a conclusion.
Present information in a professional manner.
Answer the Case Assignment questions clearly and provide
necessary details.
Write clearly and correctly—that is, no poor sentence
structure, no spelling and grammar mistakes, and no run-on sentences.
Provide citations to support your argument and place
references on a separate page. (All the sources that you listed in the
references section must be cited in the paper.) Use APA format to provide
citations and references [http://owl.english.purdue.edu/owl/resource/560/01/].
Type and double-space the paper.
Whenever appropriate, please use Excel to show supporting
computations in an appendix, present economic information in tables, and use
the data to answer follow-up questions.
