The following matrix shows the payoffs for an advertising game between

The following matrix shows the payoffs for an advertising game between Coke and Pepsi. The firms can choose to advertise or to not advertise. Numbers in the matrix represent profits; the first number in each cell is the payoff to Coke.

(Numbers in millions.) Coke (rows) / Pepsi (columns) Advertise Don’t Advertise Advertise (10, 10 ) (500, -50 ) Don’t Advertise (-50, 500 ) (100, 100 ) a. Explain why this would be described as a Prisoner’s Dilemma game. b. Explain the probable outcome of this game.

ANSWER

a. The joint profit-maximizing outcome is for neither to advertise. But there is a temptation to cheat, the dilemma, and thus the firms are likely to end up where they are collectively worst off.
b. The dominant strategy for each firm is to advertise, and thus the probable outcome is that each will earn $10 million.