(Table: Coke and Pepsi Advertising Game) Look at the Table

question 134

Multiple Choice

(Table: Coke and Pepsi Advertising Game) Look at the table Coke and Pepsi Advertising Game.The soft-drink industry is dominated by Coca-Cola and Pepsi, and each firm spends a lot of money on advertising.Suppose each firm is considering a costly television commercial during halftime of the Super Bowl.The table shows the payoff matrix of profits that each firm would receive from their advertising decision, given the advertising decision of their rival.Profits in each cell of the payoff matrix are given as (Coke, Pepsi) .If both firms expect to play this game every year for the foreseeable future, what outcome might result from tacit collusion?

• A)Coke advertises, but Pepsi does not advertise during the Super Bowl.
• B)Pepsi advertises, but Coke does not advertise during the Super Bowl.
• C)Neither firm advertises during the Super Bowl.
• D)Both firms advertise during the Super Bowl.

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Definitions:

Marginal Costs

The added cost incurred when one more unit of a good or service is produced.

Marginal Benefit

The additional pleasure or utility gained when one more unit of a good or service is consumed.

Marginal Cost

The additional cost incurred to produce one more unit of a good or service.

Opportunity Costs

The forfeiture of possible benefits from other options when selecting a specific choice.