Firms M and N compete for a market and must independently decide how much to advertise. Each can spend either $10 million or $20 million on advertising. If the firms spend equal amounts, they split the $120 million market equally. (For instance, if both choose to spend $20 million, each firm's net profit is 60 - 20 = $40 million.) If one firm spends $20 million and the other $10 million, the former claims two- thirds of the market and the latter one-third.

Firm M's Advertising

$10 million

$20 million

Firm N's Advertising

$10 million       $20 million

 a. Fill in the profit entries in the payoff table.

b. If the firms act independently, what advertising level should each choose? Explain. Is a prisoner's dilemma present?

c. Could the firms profit by entering into an industry-wide agreement concerning the extent of advertising? Explain.