Question

Two companies promote two competing products. Currently, each product controls 50% of the market. Because of recent improvements in the two products, each company plans to launch an advertising campaign. If neither company advertises, equal market shares will continue. If either company launches a stronger campaign, the other company is certain to lose a proportional percentage of its customers. A survey of the market shows that 50% of potential customers can be reached through television, 30% through newspapers, and 20% through radio. (a) Formulate the problem as a two-person zero-sum game, and determine the advertising media for each company.

Answer 1

To address the advertising problem as a two-person zero-sum game, companies should analyze each advertising medium's reach and construct a payoff matrix to identify optimal strategies. By doing so, they aim to maximize market share and profits in the context of monopolistic competition, where advertising impacts how differentiated a product appears and the elasticity or quantity of demand.

Step-by-step explanation:

To formulate the problem as a two-person zero-sum game, we must consider the possible actions of both companies in terms of their advertising strategies using different mediums: television, newspapers, and radio. Each company can choose one medium, with the goal of obtaining a majority share of the market. In a zero-sum game, one company's gain is exactly balanced by the other's loss. We must also take into account the percentage of potential customers each medium reaches.

The strategy payoffs are based on the probabilities of reaching potential customers: 50% for television, 30% for newspapers, and 20% for radio. For instance, if both companies advertise on television, the market share remains the same (50/50). However, if one company chooses television and the other newspapers, the company advertising on television is likely to capture more of the market based on greater reach (potentially leading to a market division like 60/40).

Through analysis of these strategies and reach percentages, each company should decide on the advertising medium that maximizes their potential market share gain while minimizing the risk of losing customers to the competing firm. Typically, this involves creating a payoff matrix and applying game theory principles to identify the Nash equilibrium where neither company would benefit from changing their strategy unilaterally.

Moreover, the impact of advertising in monopolistic competition is to make a company's products appear differentiated from competitors'. Successful advertising can either make demand more inelastic or increase it by shifting the perception of demand to the right. Thus, a strategic choice must consider the potential increase in profits and market share.