Final answer:
Without a specific payoff matrix, general strategies in an advertising game between two firms in monopolistic competition involve advertising in response to the rival's actions. A firm's dominant strategy, if it exists, is the best action regardless of the rival's actions. The Nash equilibrium occurs when both firms have no incentive to change their strategy.
Step-by-step explanation:
In a game of advertising between two firms within a monopolistically competitive market, firms must choose strategies based on their rival's potential actions to maximize payoff, which determines their best response. Without a given payoff matrix, we can't provide specific actions for each firm. However, typically, if Firm 2 does not advertise, Firm 1's best response may be to advertise to capture more market share. Conversely, if Firm 2 advertises, Firm 1 might still choose to advertise to avoid losing market share, depending on the relative costs and benefits. Similarly, Firm 2's responses would mirror this logic based on Firm 1's actions.
Whether either firm has a dominant strategy depends on the specific payoff matrix. A dominant strategy is one that provides a higher payoff regardless of the opponent's action. If present, the firm will always choose that strategy.
The Nash equilibrium is a situation where neither firm has an incentive to deviate from their chosen strategy, given the strategy of the other firm. It occurs when both firms are employing their best responses to the other's action.
These concepts are essential in understanding how monopolistically competitive firms leverage advertising to make their perceived demand curve more inelastic or to shift it to the right, thereby increasing quantity sold or price, and consequently, profits.